Los Angeles City Employees’ Retirement System reported a net return of 8.7% for its fiscal year ended June 30, missing its 9.5% benchmark.
The $24.3 billion pension fund beat its benchmark for the three- and five-year periods and was flat for the 10- and 20-year periods ended June 30. LACERS earned an annualized net return of 2.6% for the three years, beating its 1.8% benchmark; 7.1% for the five years, above its 6.9% benchmark; 6.6% for the 10-year period; and 7.1% for the 20-year timeframe, meeting the benchmark for both periods.
The highest returning asset class for the fiscal year was U.S. equity with a 20.1% net return, underperforming its 23.1% benchmark. The lowest return in the year ended June 30 was private real estate with -8.1%, outperforming its -8.5% benchmark.
Speaking at the Sept. 10 LACERS board meeting, Carolyn Smith, partner at LACERS’ general investment consultant NEPC, attributed a portion of the underperformance to the pension fund’s strategic overweight to small cap stocks.
“With the rise of interest rates, that’s not really a great environment for small companies,” Smith said. “Over the longer term we would expect small companies to be more nimble and outperform larger companies.”
LACERS has a 21% target allocation to U.S. equity including 6% to small/mid cap and a 26% target allocation to non-U.S. equity including 3% to developed small cap and1.33% to emerging markets small cap.
What’s more, a greater percentage of LACERS portfolio is invested in non-U.S. stocks that did not perform as well as domestic stocks, Smith said.
Non-U.S. stocks was LACERS’ largest asset class by actual investment on June 30. LACERS had $5.7 billion invested in non-U.S. equity representing 21.1% of the fund and $4.9 billion in U.S. equities amounting to 24.9% of the fund as of June 30.
LACERS target asset allocation also includes 16% private equity, 12.75% to credit opportunities, 11.25% to core fixed income, 5% to public real assets, 7% to real estate and 1% to cash.
Separately, LACERS CIO Rod June announced that Smith, LACERS lead consultant, plans to retire at the end of the year.
