CalPERS’ investments underperform in 2009
Heavy losses in real estate holdings battered 2009 investment returns at California’s giant public pension fund, although the portfolio overall rose in value for the year.
The California Public Employees’ Retirement System earned an 11.8% return on its portfolio as global stock markets recovered from the collapse of 2008, the fund said Tuesday. The portfolio had dived 27.1% in 2008.
FOR THE RECORD:
CalPERS investments: An article in Wednesday’s Business section about the 2009 investment performance of the California Public Employees’ Retirement System said the pension fund’s internal benchmark for its private equity portfolio was 45.2% for the first nine months of the year, and that CalPERS’ return was drastically below that at minus 6%. CalPERS said Friday that it had misstated its benchmark, which was actually minus 4%. —
But the gain for 2009 was far below CalPERS’ internal benchmark of 21.2%, which is based on the performance of broad indexes of investments similar to what the fund owns.
“That’s massive underperformance,” said Edward Siedle, an analyst with Benchmark Financial Services Inc., a boutique investment consulting firm in Ocean Ridge, Fla. “There’s no justification for that.”
CalPERS said its real estate holdings plunged 47.5% for the year, compared with a 15.4% drop for its benchmark index of property investment returns.
CalPERS has been hard hit in the last three years by large losses in real estate and in private equity investments, including venture capital and corporate buyouts.
The red ink has raised concerns about the ability of the country’s largest public pension system to cover the cost of retirement for 1.6 million state and local government workers, retirees and their families.
Investment earnings are expected to pay for 75% of CalPERS’ obligations, while the rest comes from contributions by government employers and employees.
The latest report on investment gains and losses was sent to members of CalPERS’ board as they prepared to meet today in Napa for a semiannual review of the system’s investment strategy.
The fund’s assets reached $203.3 billion at year’s end, up from $183.3 billion a year earlier but still down sharply from the 2007 peak of $253 billion.
“The fund is returning to health,” said CalPERS Chief Investment Officer Joseph Dear, who started last March, when assets had fallen to about $160 billion amid global stock markets’ plunge to multiyear lows.
As stocks have resurged over the last 10 months, CalPERS said, it earned 27.8% on its U.S. stock investments for all of 2009, slightly trailing its benchmark of 28.1%.
By contrast, the average domestic stock mutual fund gained 29.9% last year, according to Morningstar Inc.
CalPERS’ foreign-stock investments rose 43.3% for the year, better than the benchmark return of 43.1%.
The fund has about 54% of its assets in stocks. Most of the rest is in bonds, real estate and private equity investments.
CalPERS’ private equity portfolio lost 6% for the year. That was drastically below the fund’s internal benchmark, which showed a 45.2% gain. Results for private equity and real estate are as of Sept. 30 because of a lag in compiling data, the fund noted.
CalPERS’ private equity investments have come under fire in recent months after the fund released disclosures from investment management firms that, over the last decade, paid more than $125 million in commissions to sales intermediaries. Those go-betweens helped the managers win pieces of CalPERS’ portfolio.
Dear acknowledged that he and his 250-person investment staff had much work to do to fix the fund’s troubled real estate and private equity holdings.
“With real estate, we’re trying to take our medicine and write down the portfolio values to the market today,” he said. As a result, CalPERS has been reappraising a large portion of its property holdings.
A full-scale review of all real estate is aimed at coming up with a new CalPERS strategy that avoids debt-heavy, risky investments in raw land and residential communities in favor of “core” holdings in office buildings, Dear said.
“We want to decrease our exposure to opportunistic investments.”
Some of the more notable CalPERS real estate losses in recent years included a write-off of about $1 billion invested in a large tract of undeveloped residential property near Valencia called Newhall Ranch. In March, CalPERS also wrote down to zero a $100-million stake in apartment conversion properties in Palo Alto.
And a $500-million investment in Manhattan apartment buildings is threatened by a default on loans by a partnership that includes CalPERS.
Those investment losses have prompted CalPERS to review “all of our external manager relationships,” Dear said, warning that “there will be substantial numbers of terminations . . . in real estate and global equity and private equity, with the focus on improving the terms and conditions of our contracts.”
High on the list of changes will be a general lowering of the fees that CalPERS pays to private equity managers and other investment firms, the fund says.
More than a dozen real estate and other investment managers could be fired by the end of March, Dear said.
Dear said he had confidence in CalPERS’ long-term earnings potential even though the fund faces big challenges as the global economy recovers.
He said he still believed that CalPERS could earn its target long-term return of 7.75% a year on its mammoth portfolio. If the fund falls short of that goal, it could be forced to ask taxpayers to make up the difference, unless employee benefits are reduced.
“To make the 7.75% [a year] in the next 20 years does not require us to take undue risks,” Dear said.
But some say CalPERS and other pension funds are overly optimistic about future investment returns.
“Benefits are unsustainable and are going to break the bank if we don’t rein them in,” said Jack Dean, vice president of the California Foundation for Fiscal Responsibility.
The group is backing a pair of initiatives being circulated for signatures that would cut costs to state and local governments by reducing pension benefits for new hires.
Gov. Arnold Schwarzenegger, in his recent State of the State speech, also called for cutting pension benefits for new state employees.
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