Wednesday, January 16, 2013

CalPERS Gains 13.3% in 2012

CalPERS gains more than 13% in investment returns in 2012:
California's massive public employee pension system gained more than 13% in investment returns last year, most of it from stocks and real estate, the agency said.

It was the best year for the California Public Employees' Retirement System since 2006, when the fund gained 15.7%. CalPERS investments were up 1.1% in 2011 as it struggled to regain its footing after the Great Recession.

With more than $250 billion in assets, CalPERS is the largest public employee pension fund in the U.S. The agency administers retirement benefits for more than 1.6 million current and retired state, school and local government employees and their families.

Though it released returns for the calendar year, CalPERS reports on a fiscal year ending June 30. And its returns in the first six months of its current fiscal year were 7.1%, slightly below the 7.5% it had assumed it would gain for the full fiscal year.

"We're definitely pleased," said Joe DeAnda, a CalPERS spokesman. "Our hopes are that the performance will continue along these lines."

Investment returns are significant because they help dictate the amount of money that government agencies have to contribute to provide retirement benefits for employees. The importance of the fund's investments was magnified in 2008, when it lost 28% amid the global economic crisis and recession.

Rob Feckner, president of the CalPERS board, said he remains optimistic about the fund's future.

"As we emerge from this recession, I am positive we will continue on the path of improved transparency, accountability and ethics," he said.
Dale Kasler of the Sacramento Bee also reports, CalPERS' investments bounce back:
Boosted by stocks and real estate, CalPERS' investments bounced back strongly last year.

The big pension fund said Monday it earned a 13.3 percent profit on its portfolio in calendar 2012.

That's significantly higher than the California Public Employees' Retirement System's official investment forecast of 7.5 percent.

It's also a major improvement on the fiscal year that ended last June 30, when CalPERS earned just 1 percent.

The $252 billion pension fund's investment returns are crucial to the finances of state and local governments. The more money it earns, the less likely it is to press its member agencies for higher annual contributions. The state contributes around $3.5 billion a year to CalPERS.

The higher investment returns were spread across a broad category, with spokesman Joe DeAnda citing "strong gains in global stocks and real (estate) assets."

Stocks gained 17.2 percent. Real estate gained 12.8 percent, as the portfolio continues to rebound from huge losses suffered during the housing market meltdown.

CalPERS has restructured its real estate portfolio to focus on more conservative holdings, such as leased-up office buildings and industrial sites.

The private equity portfolio, consisting of investments in companies that aren't publicly traded, earned a 12.2 percent return.

The results were announced at a CalPERS board meeting in Monterey.
The complete breakdown was posted on CalPERS site, in this press release:
CalPERS 13.3 percent return for the 2012 calendar year was led by strong gains in global stocks and real assets including stakes in office, apartment, industrial and office buildings. Public Equity earned a 17.2 percent gain while Real Assets garnered a 12.8 percent return.
The remainder of CalPERS asset classes also showed positive results as follows (click on image):
In private equity, Reuters reports, Calpers pension fund's 2012 return 13.26 pct:
The California Public Employees' Retirement System, the biggest U.S. pension fund, posted a return of 13.26 percent in the 2012 calendar year, its chief investment officer said on Monday.

The fund's 2012 return was below a 14.43 percent benchmark, largely as a result of its returns on private equity assets, Chief Investment Officer Joseph Dear said at a meeting of the fund's board to discuss strategic issues.

The $252 billion pension fund, best known as Calpers, posted a 12.24 percent return last year on it private equity assets, compared with a sector benchmark of 28.45 percent.

For the current fiscal year to date, Calpers has posted a 7.09 percent return. The pension fund has a target of an annual return of 7.5 percent to meet its obligations.

Separately, at its meeting in Monterey, California, the Calpers board re-elected Rob Feckner to a ninth term as its president.

Feckner has been on the board since 1999 and has led it in a soft-spoken manner while pressing Calpers' corporate governance and shareholder activism campaigns and as the fund seeks to recover from steep losses from the financial crisis.

Investments held by the fund, best known as Calpers, peaked at about $260 billion in 2007 and sank to a low of $160 billion in March 2009.
The Calpers board also re-elected George Diehr to a sixth term as its vice president.
And finally, Bloomberg reports, Calpers Gained 13% in 2012 as Stocks Bury Private Equity:
The California Public Employees’ Retirement System, the largest U.S. pension at $252.3 billion, earned about 13 percent on invested assets last year, led by increases in stocks and private equity.

That compared with a 1.1 percent return in 2011, according to the fund. Private-equity investments, whose reporting lags behind the rest of the results, climbed about 12 percent for the year through September, less than half the target rate, Calpers said yesterday. Publicly traded shares rose about 17 percent, meeting goals for the period ending Dec. 31.

Public pensions such as Calpers have been under pressure to boost investment returns following historic declines stemming from the global financial crisis and the 18-month recession that ended in 2009. In 2008, the Sacramento, California-based system lost almost 28 percent on investments.

“In pension-fund time, one year isn’t a long time,” Chief Investment Officer Joe Dear said at a Calpers board meeting in Monterey. “I’m pleased, but not excessively so.”

The fund has about 74 percent of assets required to meet long-term obligations, according to Calpers. When the pension’s investments underperform benchmarks, the state and municipalities must make up the difference.
Below Threshold

For the first half of fiscal 2013, invested assets rose 7.1 percent. That’s an improvement from fiscal 2012, which ended June 30, when it earned just 0.1 percent. It was the third year in five that Calpers failed to reach the 7.5 percent threshold needed to meet projected obligations, data show.

For fiscal 2011, the system’s assets earned almost 21 percent, the best result since at least 1990, led by gains in stocks and private equity.

Following the historic declines, the fund set about restructuring its real-estate holdings, inserting more risk controls into investment decision-making, hedging some holdings against inflation, and allowing managers to better coordinate between asset classes.

Still, with half its assets invested in stocks, the fund is subject to market volatility. Its 10-year return as of Dec. 31 was about 7.5 percent.
Indeed, with half its assets in stocks, CalPERS will experience more volatility -- both on the upside and downside -- than its large Canadian peers that are moving more and more assets into private markets.

In fact, Allison Lampert of the Montreal Gazette just reported, Caisse’s real estate unit breaks ground on Chicago’s River Point tower:
Ivanhoe Cambridge Group broke ground Tuesday on Chicago’s largest commercial real estate project in five years, despite not having yet signed an anchor tenant.

In May, the real estate wing of Quebec pension fund manager Caisse de dépôt et placement du Québec announced it was backing a $300 million, 45-storey LEED gold office tower through a partnership with U.S. developer Hines. The River Point tower, for delivery in 2016, is being built with 900,000 square feet of leasable space in Chicago’s West Loop financial district.

“We are moving ahead because we see a growing economy in Chicago and the demand for this type of high-calibre office space is growing rapidly,” Ivanhoe Cambridge spokesperson Sebastien Théberge said in an email. “This building will be attractive to the firms that are expanding or relocating to the city.

“There is a lot of interest and we are making good progress with a number of potential tenants.”

Located near two rail hubs, River Point will also include a 1.5-acre public park atop the existing rail infrastructure.

In May, commercial brokers told The Gazette that The River Point tower is the first of three proposed office projects to move ahead in Chicago. The last delivery of new office construction in Chicago took place during the first quarter of 2010 with the expansion of an existing building.

The Chicago tower is one of several major real estate projects underway in the United States backed by Canadian pension funds. In New York, Ontario-based Oxford Properties Group has partnered with an American partner to develop the $15-billion Hudson Rail Yards, a so-called mini-city on the west side of Manhattan that’s to have more office space than all of Portland, Ore.

According to a recent Wall Street Journal article, Canadian pension funds have poured about $9 billion into U.S. commercial real estate in the past three years.
Ted Eliopoulos, Senior Investment Officer for CalPERS real estate program, has also been busy. In August, CalPERS announced it was committing $530 million to invest in new Chinese real estate funds that will invest in high quality office buildings in Asia. CalPERS will invest $480 million to the ARA Long Term Hold Fund sponsored by ARA Asset Management, a member of the Cheung Kong Group.

And in September, CalPERS selected Canyon Capital Realty Advisors (Canyon) to run its new $200 million Emerging Manager Program for Real Estate. This follows a May announcement where CalPERS launched TechCore, LLC, a $500 million core real estate fund established with its real estate partner GI Partners to invest in technology advantaged properties in the United States.

Note however, unlike its Canadian peers, CalPERS invests through real estate funds, not direct investments, paying fees to do so. Also, back in February 2011, after losing 42% of the value of its extensive real estate portfolio during the recession, CalPERS's Board endorsed a plan to shift away from risky residential properties, raw land and highly leveraged real estate investment trusts to so-called core holdings, mainly commercial office buildings.

As far as 2012 results, they were very good but as Joe Dear stated, one year is nothing in pension fund time. It's also worth noting that even though the results were excellent, CalPERS still underperformed its benchmark policy portfolio in calendar year 2012 (13.3% vs 14.4%), and most of that was because private equity lagged its benchmark (12.2% vs 28.5%).

On the underperformance in private equity relative to its benchmark, CalPERS' CIO, Joe Dear, shared this with me: "It's a benchmark issue. No real solution unless someone comes up with a reliable benchmark so all you can do is look at longer time periods." It certainly is a benchmark issue, a big one too, but he's right, over the long-term, it works itself out.

I'm sure this underperformance in private equity won't be as large once fiscal year results are released (their fiscal year ends June 30th). I prefer looking at fiscal year results where I can dig deeper and use the audited financial report to look at the performance of every investment activity in more detail.

Below, an interview from last March where Bloomberg's Margaret Brennan talked to Joe Dear about the fund's investment strategy and asset allocation. Dear also discusses CalPERS's review of management fees and the fund's business relationship with Apollo Management LP.

Also embedded an interested discussion I saw yesterday on CNBC on the death of the shopping mall. Jeff Jordan, partner at Andreessen Horowitz, says the quantity of retail real estate continues to slowly grow, though demand is rapidly declining.