CalPERS Gains 4.7% in Fiscal 2020
The California Public Employees’ Retirement System earned a preliminary net return on investments of 4.7% in its fiscal year ended June 30, dipping below the fund’s 7% target to be able to fulfill its pension obligations over time.CalPERS' 2019-2020 Annual Investment Report isn't available yet but when it it, you'll be able to find it here along with other pertinent investment documents.
The Sacramento-based pension system ended its fiscal year with $389 billion in assets. It reported that it's 70% funded for its future needs.
“What started out as a health crisis turned into an economic crisis and severely affected investors everywhere, including CalPERS,” said Yu “Ben” Meng, CalPERS chief investment officer, in a news release. “We’ll continue to focus on the long term and execute on our strategy to achieve our 7% targeted return.”
The 2019-20 fiscal year return brings fund performance to an average annual return of 6.3% over five years, 8.5% for over a 10-year time horizon and 5.5% over a 20-year period.
Last year, CalPERS reported a preliminary 6.7% total return on investments for its fiscal year ended June 30, when its assets stood at about $370 billion. The year before that its rate of return was 8.6%.
The returns by asset class for CalPERS in 2019-20 were fixed income, 12.5% net return; real assets, 4.6% net return; public equity, 0.6% net return and private equity, -5.1% net return.
The current asset allocation for CalPERS is 29.5% in fixed income, 12.6% in real assets, 49% in public equity and 7.7% in private equity.
“Despite significant market volatility which included assets under management declining by an estimated $70 billion in late February and March, the CalPERS Public Employee Retirement Fund was able to recover nearly all of that value by the end of June,” CalPERS said in a news release.
The fund is currently devising strategies to increase investments in private assets over several years. If CalPERS doesn’t achieve its investment goals, its pension obligations will have to be paid by higher contributions by state employees or by higher contributions from state and local governments though higher contributions or higher taxes.
The fiscal year ends at the end of June but the latest quarterly update is as of the end of March and it is available here.
The most important chart is this one showing CalPERS' asset mix:
As shown,as of the end of March, the asset allocation was 29.5% in fixed income, 12.6% in real assets, 49% in public equity and 7.7% in private equity.
In other words, half of CalPERS' total portfolio is in public equities so the total fund is vulnerable to sizable stock market selloffs like we had in the first quarter.
In fact, CalPERS' total assets stood at $356 billion at the end of March before ending its fiscal year at the end of June with $389 billion as global stocks surged from their March lows.
The second thing I note is CalPERS' only has 7.7% in Private Equity and that asset class suffered a 5% loss during fiscal 2020.
I'd be curious to know why CalPERS' PE portfolio performed so poorly but I have a feeling last year was a poor year for a lot of PE funds and it impacted many pensions.
One thing you should note is CalPERS is betting big on leverage and private equity to attain its 7% bogey but when I spoke with Ben Meng, its CIO, last month, he told me that reports on the use of leverage were wildly exaggerated (see our conversation here).
Ben also told me that in order to increase their allocation to private equity, CalPERS cannot do it through fund investments alone, it needs to ramp up co-investments, managed accounts, and Pillars III and IV "to improve our ability to deploy assets in private equity opportunities, so we can invest more in private equity, and over time, to lower costs as well as improve both CalPERS' level of control over and the transparency concerning our private equity exposure"(see this article).
Ben also told me CalPERS is improving its relationships with top funds and gaining more allocations with them but he stressed, that's not enough to ramp up private equity to where it needs to be.
As an example, CPPIB which is Canada's largest pension fund also manages roughly the same amount as CalPERS but it has 25% of its assets in private equity, half of which are co-investments where they pay no fees on larger transactions with their GP partners.
In order for CalPERS to attain a 25% allocation in private equity, it absolutely needs to ramp up co-investments with top GPs and that requires attracting and retaining top talent to CalPERS.
I'm not saying it can't be done, it can be done, but no private equity professional is moving to Sacramento unless the compensation really makes sense. It's not going to happen.
And unless CalPERS hires really good people to analyze co-investments quickly, it won't be able to ramp them up and they won't be able to materially increase their allocation to PE, even with Pillars III and IV.
The number one reason why Canada's large pensions have outperformed their global peers over the last ten years is they allocated more to private markets and private equity via co-investments.
Co-investments allow you to maintain your allocation to private equity and critically, to reduce fee drag as you pay no fees on co-investments (they are a popular form of direct investing).
That's why most Canadian pensions with a developed PE program have roughly half their PE assets in direct investments made up primarily of co-investments and some purely direct investments.
CalPERS has half its assets in Public Equities and 30% in Fixed Income. In other words, add Private Equity to Public Equities and it's roughly a 60/30 asset mix of Equities/ Bonds with the rest in Real Assets (mostly real estate).
That tells me there's way too much beta in CalPERS' asset mix and they need to diversify away from Public Equities in order to attain the long-term 7% target without a lot of volatility.
And don't forget, unlike Canada's large pensions which are fully funded, CalPERS is 70% funded, so Ben Meng can't afford to take risks which will exacerbate downside risks.
He needs to be measured and gradually and intelligently increase risk and leverage to take advantage of opportunities in public and private markets.
Below, watch CalPERS' Investment Committee from June 15 and listen carefully to CalPERS' CIO Ben Meng. You can download all board agendas here.
I also embedded a podcast where Amanda White of Top 1000 Funds talks to Ben Meng on leverage, liquidity and inflation.You can read more here.
Comments
Post a Comment