California dreamin’ of responsible funding

Relief for Californian state fund investment chiefs, their bosses and their members – with CalSTRS and CalPERS both returning 20+ per cent for the financial year – has been usurped by a reminder to politicians that the funds cannot invest their way to good health and a responsible funding strategy is required.

CalSTRS returned 23.1 per cent for the 2010-2011 financial year, its highest in 25 years, but it is still feeling the lag of the severe underperformance of 2008-2009, with the three year return at 0.98 per cent. Its actuarial rate is 7.75 per cent.

Chief executive, Jack Ehnes, said without legislative approval for increased contributions, the fund would need an equivalent of more than 20 per cent investment return each year for the next four years to achieve full funding in 30 years.

According to CalSTRS, when the next actuarial valuation is presented in spring 2012, the funding level will drop below 71 per cent.

Similarly chief investment officer, Chris Ailman, said the stock market had rebounded nicely, but was far from healthy and he said “it presses the need to put a solid funding solution into place for the long term”.

Ailman said some of the investment highlights for the year included:

* shifting 5 per cent of assets from global equities to take advantage of opportunities in distressed markets in fixed income, real estate and private equity;

* expanding asset ranges to avoid having to sell at a loss; permanently shifting 5 per cent of the portfolio from global equities to create a new asset class that protects against inflation;

* adopting a new asset allocation mix to further diversify the portfolio and reduce its stake in the global stock market; and

* launching the innovations and risk unit to explore new investment strategies such as macro global hedge funds, commodities and microfinance.

The $237 billion CalPERS also performed well for the year, with a 20.7 per cent return.

The best performing asset classes for CalPERS were global equities (30.2 per cent) and private equity (25.3 per cent).

Despite the good performance, the best for CalPERS in 14 years, chair of the investment committee, George Diehr, said the board was well aware of continuing uncertainties in the global financial markets.

“Accordingly, our strategy is accounting for such factors as high unemployment, the depressed housing market, and financial turmoil in Greece and other debt-plagued countries. We’re moving forward with our risk-focused asset allocation strategy and developing new tools to respond to market conditions,” he said.