PE portfolios surge at CalPERS, CalSTRS

The two California pension giants’ private equity portfolios outperformed other asset classes in 2010.

The $226 billion California Public Employees’ Retirement System’s $48 billion private equity portfolio was the pension’s star performer in 2010, generating returns of 21.5 percent, crushing its benchmark and topping every other asset class.

Just down the road at the $148 billion California State Teachers’ Retirement System, its $38 billion private equity programme was also outshining other asset classes, generating 16.9 percent returns at the end of 2010.

For both CalPERS and CalSTRS, the return of private equity is good news as the systems struggle to get back to the financial health they enjoyed before the economic downturn.

“The strong returns we saw in 2010 prove that our comprehensive evaluation of all our investments is paying off for our members, employers and taxpayers,” CalPERS chief investment officer Joseph Dear said in a statement.

CalPERS has worked over the past year to convince managers to cut their fees, while simultaneously weeding out underperformers. The pension recently restructured its asset allocation mix, lumping private equity into a larger “growth” bucket along with public equities and that overall accounts for 63 percent of the portfolio.

At CalSTRS, investment staff in July temporarily shifted 5 percent of the pension's portfolio from global equities to private equity, real estate and fixed income “to take advantage of the distressed market”. The pension also created a 5 percent allocation to an inflation-protection absolute return asset class, offset by a permanent 5 percent reduction in equities.

CalSTRS posted a 21.7 percent return on its private equity portfolio for fiscal 2010, which ended 30 June, a stunning turnaround from the 27.6 percent loss the portfolio suffered during the same 12-month period in 2009.

Despite the rebounding performance, CalSTRS roughly $38 billion private equity portfolio has lagged some benchmarks. In a frank assessment in September, Pension Consulting Alliance reported to the CalSTRS board the portfolio was not outperforming certain benchmarks, specifically shorter-term measurements.

CalSTRS has been watching manager performance with an eye toward ending relationships with those who are underperforming, as well as looking out for “new and potentially less traditional opportunities”.

Real estate climbs back

Real estate is a different story at the pensions. At CalPERS, real estate produced negative returns of 5 percent in 2010, though “the drop was the smallest since the beginning of the financial crisis”, the pension said in a statement.

CalPERS has reduced leverage in the real estate portfolio and cut ties with underperformers. “Our current focus is on income-generating properties, and now that we're beginning to see signs of a rebound in the market, we'll be ready to take advantage of opportunities as they arise.”

CalSTRS’ real estate holdings tipped ever so slightly into the black, generating a tiny return of 0.01 percent, according to a “snapshot” of the fund’s financial health published by the pension Thursday. While the real estate return is tiny, it’s an improvement from the 12.4 percent loss the asset class suffered in the 2010 fiscal year that ended in 30 June.

Overall performance

Four CalSTRS’ asset classes – private equity, non-US equities, US equities and fixed income – beat their benchmarks.

At CalPERS, global equity, global fixed income and the inflation-linked asset class, which includes infrastructure, all experienced positive returns. The inflation-linked asset class was up 7.8 percent in 2010, beating its benchmark by more than two percentage points. 

The positive performances contributed to overall positive returns for both systems. CalSTRS had an overall return of 12.7 percent for the $146 billion fund, a market value the fund has not achieved since 2008.

CalPERS scored a similar overall return of 12.5 percent, and its fund has gained more than $65 billion since the low point in March 2009, when the fund stood at $160 billion.

“While we’ve set the groundwork for a slow but steady recovery, we still have to work through the losses we took in 2008,” Christopher Ailman, CalSTRS chief investment officer, said in a statement. “We’re beginning to see the first green shoots of a rebound from the financial crisis.”