CalPERS 2011 return below its assumed rate by 6.65 percentage points

CalPERS eked out a 1.1% investment return in 2011, far short of its goal of a 7.75% rate of return assumption.

“The year was marked by extraordinary volatility,” Joseph Dear, chief investment officer of the $226.5 billion California Public Employees' Retirement System, Sacramento, told the CalPERS board Monday at a retreat meeting in Monterey, Calif.

Mr. Dear said CalPERS had been doing very well in the first half of the year; the investment portfolio was up by about 20%. But the volatility in the remaining part of 2011 erased most of the gains, he said.

CalPERS' returns may be less than other public plans because of the system's larger allocation to emerging and developed markets equities, which had severe performance problems in 2011.

For the year, CalPERS' real estate portfolio was one of the biggest losers in comparison to its benchmark. While the portfolio had a 9.92% return, it was below CalPERS' custom benchmark of 14.22%, a difference of more than 400 basis points, according to statistics released by CalPERS.

Public equities returned -12.3%, compared to a -12.21% custom benchmark; fixed income returned 12.38%, compared to a custom benchmark of 13.91%. CalPERS absolute-return strategies returned -2.29%, compared to a custom benchmark return of 5.6%. Private equity returned 12.37%, compared to the custom benchmark's 1.38%.

Also at the meeting, Robert Arnott, chairman of Research Affiliates, told the CalPERS board that the retirement system will have a difficult time over the long term meeting its expected annual return of 7.75% because of subpar stocks and fixed-income performance. He estimated that the most the board could expect to make over the next 10 years and beyond from the two asset classes was a combined 4% annualized.

CalPERS would need to expand exposure to alternative investment strategies, including increased exposure to investments in emerging markets in countries where he said there are still major opportunities for economic growth, Mr. Arnott said.

The CalPERS board at its meeting Monday also re-elected board president Rob Feckner to a new one-year term, and George Diehr was re-elected to a one-year term as vice president.