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Public and Private Equities Drive CalPERS Returns

The state’s retirement system earned its best returns in three years thanks to its public and private equity portfolios but remains underfunded.

Public and private equity investments drove better-than-expected returns for the nation’s largest public pension fund during its most recent fiscal year.

On Friday the California Public Employees’ Retirement System (CalPERS) released its preliminary investment results for the fiscal year that ended June 30, 2017. The pension fund earned 11.2 percent over that time period, with its public equity portfolio notching a net return of 19.7 percent and its private equity portfolio returning 13.9 percent. The pension’s assets stood at more than $323 billion at the end of the fiscal year.

This news comes as investors are pouring capital into private equity to take advantage of its steady returns. Meanwhile, the public equities market continues to outperform, with the Standard & Poor’s 500 up 13.3 percent year-on-year as of midday Friday.

CalPERS announced in April that it was reviewing how it invests in private equity managers in hopes of avoiding the asset class’s typically high investment fees. Though private equity produced better returns than it has in previous years at CalPERS, the allocation underperformed policy benchmarks by 640 basis points, or 6.4 percent, according to CalPERS.

Still, this is the best preliminary net return for CalPERS in the past three years. In fiscal year 2015-2016, the pension fund’s preliminary net returns were 0.61 percent, and in fiscal year 2014-2015, preliminary net returns were 2.4 percent.

“I am proud of our investment team for achieving double digit returns this year,” said Ted Eliopoulos, CalPERS’s chief investment officer, in a statement. “Our globally diversified portfolio performed well across most asset classes, and we were able to take advantage of what the market gave us.”

In 2015, fixed income drove the pension’s results, with a 9.29 percent net preliminary return, rather than private equity. Private equity returns hovered at 1.7 percent that year. Fixed income earned just 0.3 percent for the most recent fiscal year.

CalPERS remains underfunded. According to the pension, it is 68 percent funded, an increase of 3 percentage points since fiscal year 2015.

“Of course, we welcome this fiscal year’s strong returns, but we also remain about 68 percent funded and vulnerable to a downturn in stock markets,” said Marcie Frost, CalPERS’s CEO, in a statement. “This will be our focus as we continue to move through the asset allocation process over the next six months.”

CalPERS outperformed peers like the University of California’s pension plan, which reported a return of 6.8 percent for the fiscal year ending March 31, 2017. The fund manages $107.2 billion in assets.

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