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CalPERS to review private equity benchmark after portfolio lags

CalPERS' $31 billion private equity portfolio has underperformed its policy benchmark over both long- and short-term periods, shows a review of the program, but pension fund officials feel part of the problem is that the benchmark seeks too aggressive a return and are seeking revisions.

The private equity staff review, to be presented to the investment committee Dec. 15, shows that as of June 30 the private equity portfolio produced an annualized 10-year return of 13.3%, compared to its custom policy benchmark of 15.4% annualized.

Over the shorter one-year period, CalPERS' portfolio returned 20%, compared to the benchmark's 23.3%; over three years, it returned 12.8% annualized compared to the benchmark's 14.5%; and over five years, it returned 18.7% compared to the benchmark's 23.2%.

But the report says the benchmark — which is made up of the market returns of two-thirds of the FTSE U.S. Total Market index, one-third of the FTSE All World ex-U.S. Total Market index, plus 300 basis points — “creates unintended active risk for the program, as well as for the total fund.”

California Public Employees' Retirement System investment officials have said publicly at investment committee meetings that they feel the private equity benchmark they are shooting to outperform is too aggressive.

The review recommends that the benchmark be reviewed in 2015, something that is expected to happen as part of an overall review of benchmarks the $295.7 billion Sacramento-based pension fund is planning to undertake next year.

Despite underperforming its benchmark, the review shows that the CalPERS private equity portfolio outperformed its expected 9% investment returns set by the pension fund as part of its asset allocations targets for the one-, three-, five- and 10-year periods.

The private equity portfolio is in the midst of a restructuring. Real Desrochers, senior investment officer for private equity, has said he is intent on reducing the number of managers and funds.

CalPERS had investments with 390 managers and 684 funds, including funds of funds, as of June 30.

A separate memo to the investment committee shows that the private equity investment staff made a $500 million commitment in October to buyout fund Hellman & Friedman Capital Partners VIII and a $150 million commitment to Centerbridge Capital Partners III, a distressed debt fund managed by Centerbridge Partners.