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CalPERS underperforms real estate benchmark by 5.6%

The US’ largest public pension system attributed the underperformance to realized losses from real estate dispositions over the past year.

Sales of legacy real estate assets dragged down performance for the California Public Employees’ Retirement System (CalPERS), according to its preliminary fiscal year 2016 results that were released earlier this week.

The $302 billion pension system saw real estate generate a net return of 7.1 percent for the fiscal year ended June 30, 5.6 percent under its real estate benchmark, the NCREIF-ODCE index. The asset class returned 13.5 percent over the same time period in 2014 to 2015, beating its benchmark by 1.1 percent.

“The primary drivers of relative underperformance were the non-core programs, including realized losses on the final disposition of legacy assets in the opportunistic program,” the pension system said in a statement. CalPERS did not respond to questions about why it realized losses on those dispositions.

Last year, CalPERS sold $3 billion in non-core real estate acquired prior to the global financial crisis. In the largest-ever real estate secondaries deal, the pension system transferred stakes in 43 international and domestic funds that comprised more than 350 underlying properties to Blackstone’s Strategic Partners, PERE previously reported.

The US’ largest public pension system will not break out returns for real estate by substrategy until September, according to a media call earlier this week. Real assets overall returned 6 percent net, 5.2 percent under the index, in 2015 to 2016.

In fiscal year 2016, fixed income was a bright spot for the pension system’s portfolio with a 9.3 percent rate of return, close to its benchmark. Overall, CalPERS saw a 0.6 percent net return on investments, which executives pinned on global market volatility. CalPERS reported a 2.4 percent total net return for the previous fiscal year.

“Over half of our portfolio is in equities, so returns are largely driven by stock markets,” said chief investment officer Ted Eliopoulos in a statement. “But more than anything, the returns show the value of diversification and the importance of sticking to your long-term investment plan, despite outside circumstances.”