CalPERS' more aggressive return-seeking assets including private equity did not start to provide outperformance until the 10-year period ended June 30, according to a report to the board's investment committee.
In the fiscal year ended June 30, public and private equity asset classes, where the fund typically expects the highest levels of return, "made almost no contribution to the overall outcome of the fund," Eric Baggesen, managing investment director in asset allocation and risk management told the committee of the $417.3 billion California Public Employees' Retirement System, Sacramento.
"The public equity market increased by approximately 0.6%. Private equity, which was valued only through the March 31 date, generated a negative 5% return," he said.
It's not until the 10-year period that the portfolio started to show that public and private equities showed stronger returns than more conservative assets. Global fixed-income net return was an annualized 5.85% for the 10 years ended June 30, while global equity net return for the same period was an annualized 9.68%. Private equity, meanwhile, earned a 10.43% net internal rate of return for the 10 years ended March 31, according to reports to the investment committee.
Separately, CalPERS' general investment consultant projects the pension plan's current target allocation will earn an expected return of 5.56% annually over the next 10 years and 6.81% over 30 years, underperforming CalPERS expected rate of return of 7%.
"The interest rate environment has shifted so materially just in the last nine months that it pushed the expectation lower, because we're starting for the first 10-year period of that 30-year horizon with very muted expectations," said Thomas Toth, a managing director at Wilshire Associates.
"So, from a portfolio strategy standpoint, I do think it's gonna require looking at things that are — I'll say new — and being cognizant of the potential benefits that those types of strategies can deliver as well as the risks to the portfolio," Mr. Toth said.
In other news, in July CalPERS staff shifted $4.2 billion from fixed income to its from fixed income to its factor-weighted equity portfolio tracking the MSCI ACWI Select Factor Weighted index as part of an internal rebalancing, said Dan Bienvenue, acting CIO, in response from a question from board member Margaret Brown. As of June 30, the CalPERS factor-weighted portfolio had $58 billion.
Also, Arnold B. Phillips, the managing investment director of CalPERS global fixed income, assumed the role of interim deputy chief investment officer in August, Mr. Bienvenue told the committee.
