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…while CalPERS’ investments continue turnaround

Real estate scored the highest gains among the asset classes in the $233 billion pension plan’s investment portfolio, earning a nearly 16 percent return and exceeding its benchmark by 322 basis points.

The California Public Employees’ Retirement System (CalPERS) had a strong showing in real estate during fiscal year 2011-2012, with investments in income-generating properties such as office, industrial and retail assets delivering a gain of 15.9 percent and outperforming its benchmark by more than 3 percent.

The real estate gain “is a continuation of a substantial turnaround in the portfolio over the past year-and-a-half,” chief investment officer Joe Dear said during a media call yesterday afternoon. Indeed, CalPERS reported a gain of 10.2 percent for real estate for fiscal year 2010-2011 and a loss of 37.1 percent for fiscal year 2009-2010. At the time, Dear had attributed declines in the asset class to write-offs and deleveraging a portfolio that had borrowed too heavily at the height of the real estate boom in 2005 and 2006.

CalPERS’ $21 billion in real estate assets – which represents 9 percent of its total assets under management – comprises 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 five to seven years, according to a five-year strategic real estate plan that it adopted last year.

The strategic portfolio achieved a return of 22.6 percent, and also grew by 24 percent to $12.4 billion, while the legacy portfolio had “a significant drag on the total return of the [real estate] portfolio,” with a return of nearly 9.5 percent, during the fiscal year, said Ted Eliopoulos, head of real assets, during the media call.  

Meanwhile, the largest US pension plan reported a 1 percent overall return on investments for the 12 months ended 30 June, down from a 20.7 percent overall return the previous fiscal year – a performance that CalPERS said was negatively affected by significant allocations to the US and international public equities, which suffered a 7.2 percent loss during the fiscal year.

“The last 12 months were a challenging period for all investors, as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns,” said Dear in a statement. “It’s a clear reminder that we must remain focused on performance, risk and internal controls in today’s financial environment.”

The statement, however, noted that pension plan’s small gain on its overall investments for the 12 months ended 30 June “was helped by improved performance of CalPERS real estate investments.” Indeed, real estate was the strongest-performing asset class for the pension system in terms of both return and value added. The only other asset classes that exceeded its benchmark were infrastructure, which had an 8.4 percent gain and outperformed its index by 1.1 percent, and private equity, which recorded a 3.7 percent gain and beat its benchmark by 0.34 percent.

Still, CalPERS’ overall return was significantly below its discount rate of 7.5 percent, a target that Dear maintained the pension plan would be able to achieve. However, he acknowledged that “we will have to employ new strategies to attain that 7.5 percent return.” Such strategies would include better risk management and manager selection, he said, noting that the pension plan has restructured some of its largest asset classes – global equity, private equity and real estate – in recent years.