The $323.6 billion California Public Employees' Retirement System reported it earned a net return of 11.2% on its investments in the fiscal year ended June 30.
The returns were aided by strong public equity markets; the pension fund's $152.2 billion public equity portfolio returned 19.7% in the period, said Theodore Eliopoulos, chief investment officer, in a conference call Friday about the preliminary returns.
While the returns reverse two years of weak results, CalPERS' portfolio still underperformed its custom policy benchmark by 15 basis points. Public equities underperformed by 18 basis points.
In this latest fiscal year, the second strongest returns came from the pension system's private equity portfolio, at 13.9%, but that lagged the policy benchmark significantly — by 640 basis points.
Fixed income, CalPERS second largest asset class, had a net return of just 0.3%, but it was 115 basis points ahead of the policy benchmark
Real estate returned 7.6%, 24 basis points above the benchmark. Real estate is part of the overall real assets group, which also includes smaller allocations to infrastructure and forestland. Infrastructure returned 9.9% for the fiscal year, 345 basis points above the custom benchmark and forestland reported 1%, 268 basis points below the benchmark. (Returns for real estate, private equity and some other investments are as of March 31.)
Annualized returns for longer periods were three years, 4.6%; five years, 8.8%; 10 years, 4.4%; and 20 years, 6.6%.
Sacramento-based CalPERS, the largest defined benefit plan in the U.S., reported a meager 0.61% overall return in the previous fiscal year, which ended June 30, 2016. For the year-ended June 30, 2015, it reported 2.4%.
Based on the latest preliminary year return, CalPERS officials said on the conference call that the system's funding ratio had increased to an estimated 68%, an increase of 3 percentage points from a year earlier. The estimate was based on a 7% discount rate.
"We're long-term investors, we don't get excited by one-year results," Mr. Eliopoulos said during the call.
CalPERS' consultants have predicted diminished returns for the next decade. Officials have been reducing the pension fund's equity exposure to reduce the impact of a market downturn.
"CalPERS is focused on the long-term sustainability of our system," said Marcie Frost, the pension fund's CEO, said in a news release issued before the conference call. "Of course, we welcome this fiscal year's strong returns, but we also remain about 68% funded and vulnerable to a downturn in stock markets. This will be our focus as we continue to move through the asset allocation process over the next six months."
The investment committee is set to approve a new asset allocation early next year.
CalPERS' 7.5% assumed rate of return has been lowered to 7.375% for the fiscal year that started July 1 and will be lowered to 7% over the next two fiscal years, because of the lower return expectations.
However, that is still above CalPERS own estate of a 6.2% annualized return for the next decade.
Scott Terando, CalPERS' chief actuary, said during the conference call that increased contributions from local governmental units and the state should be a counterweight to lower investment returns in terms of the system's funding ratio. Looking long-term, beyond 10 years, the system should be able to meet its 7% assumed rate of return, he said.
Critics have said CalPERS is being overly optimistic in its return projections.