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CalSTRS PE portfolio takes a hit over past year

The $193.4bn pension fund’s private equity portfolio returns have dropped from nearly 20% two years ago to 2.9% for its most recent fiscal year.

The California State Teachers’ Retirement System’s (CalSTRS) private equity portfolio took a hit during the 2015-16 fiscal year ended 30 June due to market volatility, the pension plan said earlier this summer.

The $193.4 billion pension fund’s private equity portfolio returned a meagre 2.9 percent for the fiscal year, below the 4.6 percent produced by its benchmark, the CalSTRS Custom Private Equity Benchmark. It’s also down from 9.1 percent in the previous fiscal year (2014-15), and from 19.6 percent in the 2013-14 fiscal year.

Overall, private equity ranked fourth for performance out of six asset classes, after real estate, fixed income, and inflation sensitive assets. 

PE also came in as the most underperforming asset class against its benchmark for the Sacramento-based pension fund – a stark departure from a year ago, when it was the most outperforming asset. Global equity was the only asset class that outperformed its benchmark, coming in at 0.2 percent above the CalSTRS Custom Global Equity Benchmark.

As of 31 July, CalSTRS’ private equity portfolio had a market value of $16.1 billion, an 8.3 percent allocation to the asset class, down from $17.3 billion at 31 March, when its latest private equity report was published. CalSTRS has a target allocation of 9 percent for private equity, the portfolio for which includes buyout, venture, expansion capital, distressed debt and mezzanine.

CalSTRS’ overall portfolio delivered a 1.4 percent return for the fiscal year, down from 4.8 percent in the previous fiscal year ended 30 June 2015, and 18.7 percent in the fiscal year ended 30 June 2014.

This is in line with the private equity programmes of other pension funds that took a hit this past year, amid market-moving events like Brexit and general difficulties in the industry to realise 20-plus percent returns of the past.

CalSTRS, the largest educator-only pension in the world, said in a statement that equity market volatility and the UK vote to exit the European Union left its fund “about where it started the fiscal year in July 2015”. This marked the second consecutive year in which overall returns were below the 7.5 percent it assumed per annum.

However, its chief investment officer Christopher Ailman noted in the statement that “single-year performance and short-term shocks, such as Brexit, may catch headlines, but the CalSTRS portfolio is designed for the long haul”. Since 2010, the entire portfolio has averaged an annual 10.3 percent net return.

Since inception, the private equity portfolio has produced a net 13 percent internal rate of return, as of 31 March.