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CalPERS’ property returns decline after ‘extraordinary’ year

Real estate helped to fuel the $262.7 billion pension plan’s overall portfolio performance rebound during fiscal year 2012-13, but property returns were down from the outsized results of the previous 12-month period.

The California Public Employees’ Retirement System (CalPERS) reported another solid performance for real estate in its preliminary returns for the fiscal year ended June 30. Investments in income-producing properties such as office, industrial and retail assets generated an 11.2 percent return, outperforming the pension system’s benchmark by 1.4 percent.

The pension system identified the strong showings in real estate and global public equity as the drivers for the 12.5 percent gain for its overall portfolio, which held more than $257.8 billion in assets as of June and outperformed its benchmark by 1.5 percentage points. The total return for fiscal year 2012-13 was up from a 1 percent overall return for the previous fiscal year, but still down from a 20.7 percent overall return during fiscal year 2010-11.

During a call with reporters yesterday, Joe Dear, CalPERS’ chief investment officer, highlighted the pension system’s 11.1 percent return for the three years ending June 30, outperforming its benchmark by 43 basis points. “This is a noteworthy result because it’s the first time in years that the longer-term performance of the fund has exceeded its benchmark,” he said. He also noted that the shortfall in real estate had narrowed dramatically during that period, from 1,400 basis points to 158 basis points.  

However, CalPERS’ most recent fiscal-year performance in real estate was less robust than its results from fiscal year 2011-12, when the pension plan reported a 15.9 percent gain in the asset class, beating its benchmark, the NCREIF Fund Index – Open End Diversified Core Equity (ODCE), by more than three percent. And while real estate was the best-performing asset during that fiscal year, it was the third-strongest in fiscal year 2012-2013, behind public equity, which generated a 19 percent return, and private equity, which yielded 13.6 percent but lagged its benchmark.

Ted Eliopoulos, CalPERS’ head of real assets, attributed the difference in real estate performance over the two fiscal years to the outsized earnings from fiscal year 2011-12. “Last year’s returns for our benchmark and for our portfolio were quite extraordinary – a very, very strong year,” he explained. 

The benchmark return, however, has moderated over the past year by approximately 150 basis points, with the pension plan’s property portfolio reflecting a similar moderation. “It reflects a very strong marketplace, but a slight moderation on the appreciation, both in our benchmark and our portfolio, from last year,” Eliopoulos said.

CalPERS’ real estate portfolio grew from $21 billion to $22.5 billion over the past fiscal year, representing approximately 8.7 percent of its total assets. Property holdings consist of both a so-called strategic portfolio of primarily income-generating core properties in US retail, office, industrial and multifamily housing and a so-called legacy portfolio of non-core opportunistic assets, which it plans to wind down over the next several years, according to a five-year strategic real estate plan that was adopted in 2011. 

The strategic portfolio earned a return of 13.57 percent for the 12-month period ended June 30, outperforming its 10.28 percent benchmark. That group of real estate assets also grew 22 percent in size from $13 billion to nearly $16 billion, growing from 55 percent of the total real estate portfolio to slightly more than 70 percent. Meanwhile, the legacy portfolio shrank to approximately 30 percent of the overall property portfolio and returned 5.84 percent, falling short of its 10.28 percent benchmark. By comparison, the strategic portfolio generated a 22.26 percent return during the prior fiscal year, while the legacy portfolio returned 9.46 percent.