The chief investment officer of the California State Teachers' Retirement System, West Sacramento, said Friday that strong domestic equity returns helped the system achieve stellar performance for the fiscal year ended June 30, but warned a correction could come at any point.
CIO Christopher Ailman told the CalSTRS investment committee that historical data going back to 1932 shows the average equity bull market lasted five years; the current bull market has gone on for 66 months.
Mr. Ailman said at some point the tables will turn, but said he couldn't predict when that would happen.
In the fiscal year ended June 30, the $186.6 billion retirement system's total portfolio returned 18.7%. Mr. Ailman said that compared favorably to the 17.1% median return for pension funds greater than $10 billion compiled by State Street's universal public funds database.
Mr. Ailman attributed CalSTRS' performance to its having a larger portion of its equity allocation in domestic equity than in international stocks compared to peer funds.
U.S. equities made up 38% of the CalSTRS total fund, or $72.2 billion, compared to non-U.S. equities, at 19%.
CalSTRS' U.S. equity portfolio returned 26% in the 12 months, compared with the system's custom policy benchmark of 25.4%, and non-U.S. equities returned 23%, vs. the policy benchmark of 21.8%.
After the discussion of CalSTRS' results, the investment committee began what will be a several month discussion of shortfall risk concerning what the pension plan will do if there is another major financial downturn.
Investment consultant Neil Rue of Pension Consulting Alliance told the investment committee it will be tough for the system to achieve its investment return goal of 7.5% on a regular basis over the next 30 to 35 years.
A plan approved by the state Legislature in June increases funding to CalSTRS from school systems, the state and school employees, but Mr. Rue said if the plan does not achieve its 7.5% return on a fairly consistent basis, it won't meet its goal of reaching 100% funding. CalSTRS is now 67% funded and before the Legislature approved the new plan, was scheduled to run out of funds by 2045.
He said the system needs to earn $14 billion a year in investment return to meet its yearly liabilities, but the plan lost $45 billion during the 2008-'09 period.
Mr. Rue said that put the system behind by more than $60 billion. He said another serious financial downturn could leave the system unable to reach its full-funding goals and create serious problems.