CalPERS, CalSTRS unveil heavy losses in alternatives

The two powerful California pension funds have announced huge write-downs in private equity and real estate over the fiscal year ending in March. Both funds have implemented measures to counter the losses, including moving allocations and negotiating for lower fees.

The California state teachers’ and public workers’ pensions have implemented various measures to combat heavy losses in their private equity and real estate holdings over the past year.

The $185 billion California Public Employees’ Retirement System reported declines in its real estate holdings of about 36 percent over the 12-month period ending 31 March. The pension reported declines in its private equity holdings of 31.4 percent over the same time period. It also said it had declines of 20.9 percent in its inflation-linked assets that include infrastructure, forestland and inflation-linked bonds.

CalPERS saw a total decline in the value of its assets of 23.4 percent over the 12-month period ending 30 June, 2009. “It was the most severe single year decline,” the pension said in a statement.

At the $122.4 billion California State Teachers’ Retirement System, real estate was the worst affected asset class with the pension's portfolio declining 43 percent for the 12 months ending 31 March. Its private equity holdings declined 27.6 percent. The fund estimates a total decline in assets of 25 percent for the fiscal year ending 30 June.

To combat the losses, CalPERS has begun negotiating with private equity fund managers for lower fees. The pension also boosted its allocation to private equity from 10 percent to 14 percent in June. At the time, CalPERS said the allocation change was to address the “misalignment of the portfolio in the wake of the financial market crisis of 2008”.

CalSTRS also is moving around its allocations to various asset classes. At the pension’s meeting in August, CalSTRS will bump up its contribution to real estate to 15 percent from 13 percent and its allocation to private equity to 12 percent from 11 percent , according to a spokesperson. As part of the asset allocation shift, CalSTRS is reducing its exposure to global equities from 55 percent to 47 percent and fixed income from 21 percent to 20 percent.

The pension also is creating a new asset class called “absolute return” that will include inflation-protected assets like infrastructure investments. CalSTRS will dedicate 5 percent of the fund to the asset class. The structure of absolute return has not yet been worked out, but could include a search for a manager to run the programme, the spokesperson said.

“At the same time, we have the capacity to move forward with our internal staff” on the absolute return programme, the spokesperson said.

Also, CalSTRS created a programme earlier this year called “equity return” to buy “quality” assets from distressed sellers across real estate, private equity and fixed income. The pension diverted 5 percent of its global equities allocation to use in the new programme.

The CalSTRS spokesperson said transactions have been made under the equity return programme but it is unclear how the public reporting process will work for investments made in the programme.