Fink tells CalPERS 7.6% annual return unlikely

CalPERS needs to earn 7.6% a year over the next 15 years to become fully funded but that might be just pie in the sky, one of the investment world's leading lights told the pension fund's board this week.

"You're not going to get a 7.6% return when the U.S. is seeing a subpar (economic) growth rate of 2(%) to 3%," said BlackRock Inc. Chairman and CEO Laurence Fink, adding, “You'll be lucky to get 6% on your portfolios, maybe 5%.”

Mr. Fink, along with James Coulter, one of the founders of private equity firm Texas Pacific Group, spoke to the board of administration of the California Public Employees' Retirement System, Sacramento, offering their views on the economy and how the $178.1 billion pension fund might navigate the still-choppy waters.

They spoke to the board during its biannual off-site meeting, where board members ponder big-picture issues.

CalPERS has projected that it will need an annual asset return of 7.6% for its pension fund to be fully funded in 2024, assuming a 6% contribution growth rate and a 4.64% liability growth rate. CalPERS' current return assumption is 7.75% over 30 years.

But Mr. Fink said he does not think that is possible, given the state of the economy.

To achieve that 7.6% return, CalPERS would need a much more global portfolio and might also have to increase its contributions, Mr. Fink said. Otherwise, the only recourse is to lower its return target, he said.

The somber words were not a complete surprise to the CalPERS board. The fund's CIO, Joseph Dear, had already acknowledged a tough road ahead.

“It's not realistic to expect our investment office to earn our way back,” he acknowledged at the meeting.

CalPERS recently reported a 23.4% decline in its portfolio's investment performance for the fiscal year ended June 30, the pension fund's greatest single-year decline in its 77-year history. Assets under management plunged to $180.9 billion from $237.1 billion a year earlier.

Despite his gloomy prediction, Mr. Fink did provide some optimism on the economy, noting that even though there has been a flight to safety among investors — with money shifting into money market funds and bank deposits — there are still trillions and trillions of dollars ready to be reinvested.

“I believe we've seen the worst of it,” he said. “We are seeing the first signs of flows back into longer-dated fixed income, equities and alternatives in the face of 0% cash yields.”

Mr. Coulter of TPG said he, too, is reasonably optimistic about the economy, at least in the longer term, “but we're still early in this cycle. We're only in the first year of a three-year consumer downturn cycle.”

He noted that much of the current gross domestic product is coming through the government stimulus, so although the economy will experience a tailwind this year, it could feel a headwind next year when the stimulus runs out.

In terms of areas to invest, Mr. Coulter was bullish on distressed debt, but cautioned it can be very tricky.

"Be careful of the flavor of the day — be careful of being the dog that caught the bus,” he said. “Get managers who can manage the company if they end up owning it. If you're going to play distressed debt, you better have big pockets."