CalPERS misses its target return by a wide margin


The California Public Employees’ Retirement System said it missed its return target by a wide margin, hurt by a sluggish global economy and an under-performing private equity portfolio.

The nation’s largest public pension fund said its investments returned just 2.4% for its fiscal year, ended June 30, far below its 7.5% investment target.

In a conference call with reporters Monday, CalPERS’ chief investment officer, Ted Eliopoulos, said the main culprit was a sluggish world economy that held down returns on its giant stock portfolio, which makes up 54% of the $301-billion fund.


The stock portfolio’s return was only 1%, underperforming the 1.3% returns at its benchmark portfolio. Eliopoulos noted that the fund has done better than the 7.5% target over the previous three- and five-year periods.

“We try not to focus or get too excited about any one year’s given return,” he said. “We look more meaningfully at longer time horizons.”

A surprising disappointment was its private equity portfolio, which accounts for about 9% of the fund. That portfolio’s return was 8.9%, which was a significant miss at 2.21 percentage points below CalPERS’ benchmark. The segment has come under scrutiny for its complexity and lack of transparency in disclosing performance fees.

Eliopoulos said CalPERS would provide a more detailed accounting of the portfolio’s segments and managers in August. He said that, historically, CalPERS’ private equity portfolio has outperformed both the public stock market and the fund’s private equity benchmarks.

In June, CalPERS said it would halve the number of investment managers in its private equity and other portfolios, now at more than 200 managers, over the next five years. This month the fund said it would report private equity performance fees beginning in the fall.

Analysts mostly agreed that a single year’s results shouldn’t be given too much weight.

“It’s very hard to truly benchmark a portfolio over a year’s period,” said Anne Anquillare, chief executive of PEF Services, a West Orange, N.J., private equity back-office service provider. “Usually, you look at five-year periods.”


And although fees have become a prominent part of recent discussion about CalPERS’ private equity portfolio, Steven N. Kaplan, a professor of finance at the University of Chicago, said they aren’t the main issue.

“At the end of the day, what matters is the net performance, i.e., performance after fees,” Kaplan wrote in an email. If private equity outperforms public equity, he said, then CalPERS is “better off” continuing to invest in private equity.

A surprising bright spot came from the real estate portfolio, now about 10% of the overall portfolio. It is still recovering from the financial crisis of 2008. Real estate had posted below-par results through the first 10 months of the fiscal year.

Its returns for the year, however, came in at 13.5%, beating its benchmark by 1.14 percentage points, a significant margin.

CalPERS’ investment performance is closely watched because of its sheer size and the huge effect the system has on state and local taxpayers, who must make up any shortfall.

The system was only 77% funded as of June 30, 2014, the latest figures available.

Twitter: @deanstarkman