Opportunistic investments drag CalPERS’ RE return 10% below benchmark

The largest US pension fund revealed yesterday that its opportunistic investments were largely at fault for its real estate portfolio underperforming its blended benchmark by 10 percent. CalPERS nonetheless produced its first positive annual return since 2007.

The California Public Employees’ Retirement System, the largest US pension fund, was this week celebrating its first positive annual return in four years, but said its performance was still hampered by its opportunistic investments.

Releasing preliminary results for the 12 months ending June 30, the pension fund said its total assets of $237.5 billion, had produced a total return across assets classes of 10.2 percent. While that was a ‘pleasing result’, of its real estate investments, opportunistic investments were largely to blame for the pension fund missing its blended benchmark expectation for the year of 20 percent.

Ted Eliopoulos, senior investment officer for real assets, real estate and infrastructure forestry, said on a teleconference yesterday: “Our opportunistic portfolio turned in a slightly negative 1.6 percent for the year and largely made up the underperformance of real estate for the year.”

In the results, CalPERS did not disclose the value of its real estate portfolio as at June 30, although according to its official website, its real estate assets were valued at $17.8 billion, equal to 7.4 percent of total assets, as at April 30.

Eliopoulos described CalPERS’ real estate as a ‘tale of two parts’, pointing also to the positive performance of the pension fund’s core real estate, both public and private. He said CalPERS’ core portfolio, which represents approximately 50 percent of its total real estate assets, outperformed its benchmark of 16 percent, recording a 29 percent return.  But he said: “The other half of the portfolio is the other half of the tale.”

When asked to drill down further as to what parts of the opportunistic portfolio underperformed, he replied: “Part of the portfolio is largely development, housing and land development and repositioning of properties. One part acts as a drag on the portfolio with a negative 35 percent [return] on the year.” He added that housing development land accounted for 5 percent of CalPERS’ total real estate portfolio. The US has faced housing land oversupply since the credit crunch, to which Eliopoulos said: “We’re hoping for a housing recovery in the future but [we’re] not selling properties in the housing portfolio at fire sale prices.”

Elsewhere in the preliminary results, CalPERS said it its private equity return for the year was 25.3 percent, part of an overall return of 20.7 percent, beating its policy benchmark by 55 basis points. It said the performance of its private equity portfolio was its best for 14 years. Real Desrochers, its senior investment officer for private equity apportioned the reason in part to rebounding valuations in the large buyout part of its portfolio.

CalPERS’ posted its results as California State Teachers’ Retirement System also revealed its returns. CalSTRS posted a total return of 23.1 percent for the year. Responding to questioning about relative performance with CalSTRS, CalPERS chief investment officer Joseph Dear said: “Our hats off to CalSTRS. Our concern is our own benchmark.”