CalPERS, CalSTRS Post Strong Gains

The Associated Press reports, CalPERS, CalSTRS post gains:
The nation's two largest public pension funds on Monday reported double-digit annual returns from rising stock and real estate prices, but cautioned against focusing too much on short-term performance.

The California Public Employees' Retirement System reported a 12.5 percent annual return while the California State Teachers' Retirement System announced it gained 13.8 percent for the year that ended June 30. Both had dismal performances last year-- CalPERS earned 1 percent and CalSTRS gained 1.8 percent.

CalPERS' chief investment officer Joe Dear said the fund's buy-and-hold investment strategy is working.

"When things got rough, we didn't panic," Dear said in a statement. "We stuck with our exposure to growth assets and applied the lessons we learned from the past."

Both funds outperformed their discount rates of 7.5 percent, the projection CalPERS and CalSTRS uses to meet current and future obligations.

Despite the gains, California's public pensions remain underfunded. CalPERS has an estimated unfunded liability of $100 billion, while CalSTRS reports a funding gap of $70 billion.

"This year reminds us that a pension fund measures its health over the long term and no single year can take us from underfunding to funding adequacy," said Jack Ehnes, CalSTRS' chief executive officer, in a statement.

The teachers' pension fund has been urging Gov. Jerry Brown and state lawmakers to review contribution rates because unlike CalPERS, it lacks the authority to set the contribution rate.

CalSTRS serves 862,000 public school educators and their families and has assets worth $166 billion as of June 30. CalPERS administers a $258 billion system for 1.6 million state and local government workers and their families.

Henry Jones, a CalPERS board member and chairman of its investment committee, also called for looking ahead.

"CalPERS is a long-term investor and we try to not focus too much on one year of performance," Jones said. "But obviously 12.5 is a great number and we're pleased with the performance."

Dear said in a call with reporters Monday that domestic and international stocks at the nation's largest public pension system returned 19 percent, outperforming its benchmark by nearly 1 percentage point.

Dear said CalPERS' strong performance suggests that the pension fund is resilient and won't fail despite concerns from pension critics. The fund's 20-year investment return is 7.6 percent.

"I think these numbers are convincing evidence that CalPERS has the ability to produce good return on a sustainable basis," he said.
You can read details of CalPERS' results in this press release. As shown below (click on image), the gain was led by strong performances in global public equity and real estate investments. Investments in domestic and international stocks returned 19 percent, outperforming the CalPERS custom public equity benchmark by nearly one percentage point. Investments in income-generating real properties like office, industrial and retail assets returned 11.2 percent, outperforming the Fund's real estate benchmark by 1.4 percent.

Details of CalSTRS' results are available in this press release. As shown below (click on image), the gain was led by global equity, private equity and real estate. Real estate and inflation sensitive assets outperformed their benchmarks by 3.6% and 3.3% respectively while private equity underperformed its benchmark by 4.1%.

Note, however, the benchmark in private equity is the Russell 3000 ex tobacco + 300 basis points and results of assets and benchmarks for private equity and real estate are lagged by a quarter. CalSTRS' private equity benchmark is one of the toughest benchmarks in the industry and next to impossible to beat when U.S. stocks are soaring as they have been doing since the start of the year.

The results from CalPERS and CalSTRS are impressive but as they state, one year doesn't mean anything in the pension fund industry. Moreover, both funds are dealing with sizable funding gaps which need to be addressed. Strong investment gains and higher interest rates will help but not suffice to bring these giant funds back to fully-funded status. The same goes for many other other U.S. public pensions which are in far worse shape.

A few other things worth noting on CalTRS and CalPERS:
  •  Pension Funds Online reports that CalSTRS announced the selection of Pension Consulting Alliance (PCA) as the private equity consultant to its Investment Committee for the next five years. PCA will provide independent assessments of the private equity portfolio's performance. The CalSTRS Private Equity portfolio was valued at $22 billion or 14.4% of the overall investment portfolio, as of March 31, 2012.
  • Pension Funds Online also reports that CalSTRS awarded Industry Funds Management (IFM) an infrastructure mandate worth up to $500m. The money is to be invested in a diversified portfolio of core infrastructure assets in North America and Europe. It is one of the largest single U.S. fund management commitments made in infrastructure.
  • According to Investments & Pensions Asia, CalSTRS is looking into the possibility of expanding its international real estate portfolio and investing capital in Europe. According to its business plan for the 2013-14 fiscal year, developed with real estate consultant the Townsend Group, CalSTRS is looking "across the spectrum" – from opportunistic to core assets – in world-class cities worldwide, particularly in Asia, Europe and Latin America. 
  • Pensions & Investments reports that CalPERS will take a close look at the value of external active equity managers but won’t start the review until 2014. CalPERS’ investment committee agreed at a meeting Monday to use index-tracking strategies when there is a lack of conviction that the pension fund can add value through active management. What that means for CalPERS’ several dozen external active equity managers is unclear for now. External managers run about 18% of the pension fund’s $134 billion equity portfolio.
  • Pension Funds Online reports that CalPERS awarded a $500m mandate to Standard Life Investments as part of its multi-asset class (MAC) partners program. Standard Life is the first of four external managers selected to partner with CalPERS in the MAC program. The first aim of the program is to outperform the CalPERS total fund by primarily using public market assets and doing so with lower volatility and less risk. The second aim is to cultivate the sharing of information between MAC partners and CalPERS investment staff and to help develop sustainable and efficient methods of increasing the likelihood of meeting long-term CalPERS investment return goals.
  • CalPERS has decided to delay launching an online database of public pension information, citing moves by a retiree group to pursue legislation that would narrow how much of that information would fall under the state Public Records Act.
  • The Associated Press reports that California's two public pension systems continued to fly top officials around the globe for conferences, workshops and speaking engagements even after Gov. Jerry Brown ordered a ban on discretionary travel while the state was trying to emerge from years of budget deficits. While some travel expenses were for due diligence related to the pension funds' investments, there appeared to be non-essential trips to attend industry association conferences in Toronto, networking opportunities with traders and hedge fund managers in Europe and educational seminars in Boston and Washington, D.C.
I can assure you that travel expenses are a huge part of the budget for any public pension fund and these expenses are justifiable as they pertain to due diligence on investments and networking/ research/ industry conferences. At least CalPERS and CalSTRS publicly disclose the travel expenses of their senior officers and board members.

Finally, CalPERS announced last month that Joe Dear, its CIO, was undergoing treatment for prostate cancer. While still working, Dear ceded some of the day-to-day investment operations to Theodore Eliopoulos, a senior investment officer. I wish Joe Dear a speedy recovery and remind my readers that prostate cancer is the most common non-skin cancer in America, affecting 1 in 6 men, and treatable once detected early.

Below, Chris Ailman, CalSTRS CIO, discusses the rise in market volatility, the Fed's monetary policy and Japan's economy with a panel on CNBC. Ailman recently spoke with CNBC's Brian Sullivan, discussing their results and providing three tips to retire rich (see below). Click on this link to watch full clip.