CalPERS Posts 9.3% Gain for Fiscal 2024
The California Public Employees’ Retirement System reported a 9.3% gain for its latest fiscal year, with returns driven largely by public equity investments and private debt.
The returns, which outpaced a 6.8% annual target, pushed total assets at the biggest US public pension fund to $502.9 billion for the fiscal year ended June 30, Calpers said Monday in a statement. That’s enough to cover 75% of its future obligations, better than 72% at the end of the previous year.
The preliminary five-year average return now stands at 6.6%, up from 6.1% the previous fiscal year.
Calpers said that public equity investments led the way among asset classes with an estimated 17.5% return, and that private debt came in second at 17%. Private market returns are reported with a one-quarter lag.
The largest US pension fund is increasing its exposure to private equity and private credit in a $34 billion bet that the riskier assets will fuel returns. The board made that decision earlier this year, boosting the target allocation for private equity to 17% of the portfolio, up from 13%. It’s also increasing private credit to 8% from 5%. It plans to pare its exposure to publicly traded stocks and bonds.
Investors have been beset by paltry returns as private equity firms struggled to offload portfolio companies in a lackluster dealmaking market and higher interest rates made it more expensive to finance those firms.
One metric that has become a proxy for satisfying fund backers is distributions, which are at their lowest level since the 2008 financial crisis. Distributions by some of the biggest private equity investment managers plunged by almost 50% last year compared with 2021.
A chorus of industry leaders has declared an end to the era of easy profit in the asset class. That means “fewer realizations and lower returns” are on the horizon for much of the industry, Apollo Global Management Inc. Co-President Scott Kleinman said last month at a conference in Berlin.
Calpers, however, is playing catch-up in the asset class after missing out on an earlier boom in private equity. The successive resignations of two chief investment officers, along with the downturn, have complicated the strategy.
The pension fund hired Stephen Gilmore from New Zealand’s sovereign wealth fund to start as its next chief investment officer this month. In his previous role, Gilmore had pushed for more investments in private assets.
Calpers manages money for more than 2 million retired police, firefighters and public services employees. If there’s a shortfall, municipalities across California could be forced to cut services to meet pension obligations.
Earlier today, CalPERS issued a press release reporting a preliminary 9.3% investment return for 2023-24 fiscal year:
SACRAMENTO, Calif. – CalPERS today reported a preliminary net return of 9.3% on its investments for the 12-month period ending June 30, 2024. Assets as of that date were valued at $502.9 billion.
The investment return outpaced the discount rate of 6.8%, comparable to an assumed rate of return and a policy marker established by the CalPERS Board of Administration. It was also a notable improvement from the two most recent fiscal years, where investment returns were influenced by a variety of economic and geopolitical challenges.
When using the preliminary net return of 9.3% to assess long-term obligations, the overall estimated funded status of the Public Employees’ Retirement Fund (PERF) stands at 75%.
"Our investing strategy was well positioned to take advantage of improving economic conditions over the past 12 months," said CalPERS Chief Executive Officer Marcie Frost. "Meeting or exceeding our long-term investing goals is crucial for providing the retirement benefits that our 2 million members and their families are counting on."
Public equity investments, comprising 41.9% of the PERF, led the way among asset classes with an estimated 17.5% return.
The private debt asset class, established in 2022, also performed strongly. Its estimated return was 17%.
Fixed income and private equity reported returns of 3.7% and 10.9%, respectively. Real assets reported a negative return for FY 2023-24.
"Our team remains focused on executing on our long-term investment strategy, building a diversified portfolio to navigate markets and mitigate volatility over our multi-generational investment horizon," said Interim Chief Investment Officer Dan Bienvenue.
Updated long-term return rates reflect the addition of recent lower investment returns in the calculation. Preliminary total fund annualized returns for the five-year period ending June 30, 2024, stood at 6.6%; the 10-year period at 6.2%; and the 20-year period at 6.7%.
The 30-year return rate rose slightly to 7.7%.
Preliminary net returns are an early snapshot of the CalPERS portfolio. CalPERS investment and finance staff and outside experts will review the portfolio's performance in the next few months to determine the final fiscal year returns for 2023-24.
The ending value of the PERF for FY 2023-24 will be based on additional factors beyond investment returns, including employer and employee contributions, monthly payments to retirees, and various investment fees.
Once finalized, fiscal year performance returns are used to set contribution levels for the State of California and school districts in the 2025-26 fiscal year and for contracting counties, cities, and special districts in the 2026-27 fiscal year.
Under the current provisions of the CalPERS Asset Liability Management process, investment returns that exceed the established 6.8% discount rate require the Board of Administration to review whether to lower the rate for future years. This process is included in the CalPERS Funding Risk Mitigation Policy.
Media Advisory
A news media availability via Zoom to discuss fiscal year investment returns with CalPERS senior leaders will be held Monday, July 15 at 12:45 p.m. PDT. Credentialed media can send an email to newsroom@calpers.ca.gov for login information.
About CalPERS
For more than nine decades, CalPERS has built retirement and health security for state, school, and public agency members who invest their lifework in public service. Our pension fund serves more than 2 million members in the CalPERS retirement system and administers benefits for more than 1.5 million members and their families in our health program, making us the largest defined-benefit public pension in the U.S. For more information, visit www.calpers.ca.gov.
The 2023-24 annual report isn't available yet so we can't delve into details but when it will be, they will post it here.
The results are largely in line with what Canada's large pension funds posted that were more tilted to public equities and private credit, ie. strong returns in stocks led by US Mag Seven stocks and decent performance in private credit.
CalPERS actually posted outstanding figures in both: 17.5% in Public Equities (41% of the asset mix) and Private Debt which was established in 2022 posted a 17% gain.
That 17% gain in private debt is a bit dubious to me, much higher than I've seen elsewhere, and it could be a new fund that delivered outstanding results but I would expect those returns to peter out in the high single digit area over the next five to ten years with some hiccups along the way.
Private equity posted decent returns, up 10.9%, despite clear challenges there as distributions have fallen off a cliff (funds don't want to sell because they can't realize the values they're looking for).
Real assets made up mostly of infrastructure and real estate were hit and if I had to hazard a guess, offices dragged down returns there.
Overall results were solid over the last fiscal year. For the five-year period ending June 30, 2024, stood at 6.6%; the 10-year period at 6.2%; and the 20-year period at 6.7%.
This isn't as solid as Canadian funds and I suspect it's because CalPERS isn’t as exposed to private equity and didn't have the right approach, co-investing along with top funds on larger transactions to lower fee drag.
The funded status did improve because stocks were up but more importantly because the long-term Treasury yield was up, lowering the present value of future obligations. Still, the PERF remains underfunded at 75% funded status which is why they can’t risk a big drawdown.
Anyway, that's my quick note on CalPERS, the only thing I would add is they better have the right approach in private equity and the right strategic partners in private debt.
That's the job of their new CIO Stephen Gilmore, who I presented here.
Stephen just started working at CalPERS, getting the lay of the land there.
Below, a month ago, CalPERS' CEO Marcie Frost gave her report, beginning by emphasizing shareholders' rights and encouraging good governance at publicly traded companies. Take the time to watch her deliver her comments. She talked about ExxonMobil as well as Elon Musk's outrageous payout which they voted against in 2018 and this year.
Second, Frank Luntz, pollster and political strategist, and Jeff Horwitt, Hart Research partner and pollster, join 'Squawk Box' to discuss the latest developments int he assassination attempt against former President Trump, the likely impact on the 2024 race, and more.
Third, Dave McCormick, Republican Pennsylvania senate candidate, joins 'Squawk Box' to discuss his thoughts on the assassination attempt of former President Trump, state of the 2024 presidential election, and more.
Lastly, Roger Altman, Evercore founder and senior chairman, joins 'Squawk Box' to discuss his reaction to the assassination attempt on former President Trump, the impact on the markets, impact on the 2024 race, and more.
Let me just say I was relieved President Trump wasn't gravely hurt and it's clear that there needs to be unity across party lines to lower divisive rhetoric and strongly denounce political violence.
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