Real estate recovery starts at CalPERS, CalSTRS

The two California pension giants’ real estate portfolios began the long road back to health generating 0.01% and -5% returns, the latter being the smallest decline since the start of the financial crisis.

Real estate returns at the two largest public pension plans in the US showed signs of recovery in 2010, after the California Public Employees’ Retirement System and the California State Teachers’ Retirement System reported some of their best returns for the asset class in two years.

The $226 billion CalPERS pension, which has a $16.6 billion property portfolio, said real estate produced negative returns of 5 percent in 2010, “the smallest [drop] since the beginning of the financial crisis”.

Just down the road at the neighbouring $148 billion CalSTRS pension fund, real estate tipped ever so slightly into the black, generating a tiny return of 0.01 percent, according to a “snapshot” of the fund’s financial health published by the pension Thursday. While the real estate return is tiny, it’s an improvement from the 12.4 percent loss the asset class suffered in the 2010 fiscal year that ended in 30 June.

The top performing asset class for both California pensions in 2010 was private equity, generating returns of 21.5 percent for CalPERS and 16.9 percent for CalSTRS. The results for both private equity and real estate is
good news as the systems struggle to get back to the financial health they enjoyed before the economic downturn.

“The strong returns we saw in 2010 prove that our comprehensive evaluation of all our investments is paying off for our members, employers and taxpayers,” CalPERS chief investment officer Joseph Dear said in a statement.

Over the past six months, CalPERS has cut the number of real estate fund managers it deals with, particularly in its core portfolio. Hines and LaSalle both lost mandates to run CalPERS office and industrial core portfolios, with smaller better performing managers selected instead.

CalSTRS has also been watching manager performance with an eye toward ending relationships with those who are underperforming, as well as looking out for “new and potentially less traditional opportunities”.

In July, investment staff at CalSTRS temporarily shifted 5 percent of the pension's portfolio from global equities to private equity, real estate and fixed income “to take advantage of the distressed market”. The pension also created a 5 percent allocation to an inflation-protection absolute return asset class, offset by a permanent 5 percent reduction in equities.

Christopher Ailman, CalSTRS chief investment officer, said in a separate note that the groundwork for a “slow but steady recovery” had been set, adding: “We’re beginning to see the first green shoots of a rebound from the financial crisis.”

Overall performance

Four CalSTRS’ asset classes – private equity, non-US equities, US equities and fixed income – beat their benchmarks.

At CalPERS, global equity, global fixed income and the inflation-linked asset class, which includes infrastructure, all experienced positive returns. The inflation-linked asset class was up 7.8 percent in 2010, beating its benchmark by more than two percentage points. 

The positive performances contributed to overall positive returns for both systems. CalSTRS had an overall return of 12.7 percent for the $146 billion fund, a market value the fund has not achieved since 2008.

CalPERS scored a similar overall return of 12.5 percent, and its fund has gained more than $65 billion since the low point in March 2009, when the fund stood at $160 billion.