America’s two largest pension funds both lost around a quarter of their market value in the fiscal year ended June 30, in what was the biggest ever single year decline for CalPERS.
Releasing its preliminary 2008-09 fiscal year investment performance, CalPERS said the 23.4 per cent drop in assets was the “most severe” single-year decline the fund has experienced, but still above the 29.3 per cent plunge in world equity prices over the same period.
CalSTRS’ loss of 25 per cent was largely due to a -43 per cent return on its real estate portfolio, in addition to -28.2 per cent for global equities and -27.6 per cent for private equity, spurred by unprecedented declines in global financial markets. Fixed income contributed the only positive return of 4.5 per cent.
The fund pointed out that it had chosen to “write down” the value of its real estate portfolio in a single year, rather than spreading the expected losses over several years.
Taking the losses into account, CalSTRS assets fell to $118.8 billion, compared to $162.2 billion the same time last year. CalPERS assets fell to $180.9 billion, down from $237.1 billion a year ago.
The asset class returns for CalPERS were: 1.4 per cent for cash, 0.6 per cent for global fixed income, -35.8 per cent for real estate, -31.4 per cent for private equity, -28.5 per cent for public stocks and -20.9 per cent for inflation-linked assets such as commodities, infrastructure, forestland and inflation-linked bonds.
Real estate and private equity returns reflect market values through to March 31, 2009, not June. Pending appraisals in real estate and valuation adjustments in private equity will impact final year end performance numbers.
CalPERS chief investment officer Joe Dear said the result was “not a surprise” and had been expected given the collapse of markets across the globe.
“The good news is we have the opportunity to capture future returns because of our long-term investment horizon,” he said. “The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger.”
CalSTRS, too, attempted to put a positive spin on the result, with chief investment officer Chris Ailman pointing out that recent portfolio adjustments, as reported last week on conexust1f.flywheelstaging.com, positioned the fund for the coming recovery.
The fund has temporarily shifted 5 per cent of the portfolio from global equities to fixed income, real estate and private equity to purchase quality assets from distressed sellers, and permanently shifted 5 per cent from global equities to create a new asset class – absolute return – for inflation-protected assets such as infrastructure.
CalPERS has also repositioned its portfolio, revising its asset allocation to “maintain flexibility to make opportunistic investments in private equity, real estate and infrastructure today and planning toward a fuller asset allocation and liability review in 2010”.
The fund has engaged a board-directed initiative to advance new methods for risk management across its entire operations, and is “searching for and executing opportunistic investments resulting from market dislocations”.
CalPERS’ board recently adopted a 30-year fixed contribution schedule for local governments that will cover the funds needed to cover benefits, and won’t rely on future investment returns.
CalSTRS’ board is working to address a long-term funding gap, calculated asÂ $22.5 billion at June 30, 2008. The fund said closing the gap would require legislative action in the future to increase contributions made by the school districts and the state.