California Pension Giants Bounce Back

Leo Kolivakis's picture

Via Pension Pulse.

this week, Michael B. Marois of Bloomberg Businessweek reported, California
Teachers Fund Earns 12% After Record Loss Last Year

California State Teachers’ Retirement System, the second-biggest U.S.
public pension fund, earned 12.3 percent in the year ended June 30, led
by gains in stocks and bonds that offset losses in real estate.


Calstrs, as the
Sacramento-based fund is known, ended the fiscal year with $129.8
billion under management, up from $118.8 billion a year earlier. Stock
holdings earned 14.5 percent and its bonds rose 12.3 percent, the fund
reported today. Investments in private equity funds rose 21.7 percent,
while real estate fell 12.4 percent.


“We’re not out of the woods yet,” Calstrs Chief Investment Officer
Christopher J. Ailman said in a statement. “The American economy
suffered a near-death experience in 2008, and it’s going to take some
time to fully recuperate from that.”


The gain
comes as the fund that provides benefits for 833,000 public school and
community college teachers plans to ask lawmakers in 2011 for an
increase of as much as 14 percent to what the state and school
districts already pay toward employee retirement benefits.


The fund lost 25
percent in 2009, led by a 43 percent drop in real-estate and a 28
percent decline in private-equity. The pension said in January that its
unfunded liability, the difference between assets and anticipated
future costs, had almost doubled to $42.6 billion since June 2008.


The fund’s board in June voted to launch a
commodities program as part of an inflation-linked asset class. The
category can account for as much as 5 percent of holdings.

Commodity prices surged 23 percent last year as the
outlook for global economic growth, led by China, the fastest-growing
consumer of raw materials, spurred demand for metals, energy and
grains. Higher prices have drawn increased interest from hedge- fund
managers and pension funds.


The California
Public Employees’ Retirement System is the largest public pension fund
in the U.S., with $201.5 billion of assets as of June 2.

On Wednesday, ai5000 reports, CalSTRS
Thanks Alternatives for Positive Returns

The $129.8 billion California State Teachers'
Retirement System (CalSTRS), the nation’s second-largest public pension
fund, posted its first gain in three years, partly attributing its
growth to successfully boosting
its allocation to alternatives


“We’ve taken steps to position the
portfolio for long-term growth, but we’re not out of the woods yet,”
said Chief Investment Officer Christopher Ailman. “The American economy
suffered a near-death experience in 2008, and it’s going to take some
time to fully recuperate from that. This year’s performance is a solid
start along that road to recovery.”


In the year ended June 30, the plan returned 12.3%, boosted by a
21.7% return in its private equity portfolio. After falling by about
25% in its last fiscal year, the CalSTRS Board and investments staff is
seeking recovery by:

  • Expanding its target asset
    ranges to avoid having to sell at a loss.
  • Temporarily
    shifting 5% of the portfolio from global equities to fixed income, real
    estate and private equity to take advantage of the distressed market.
  • Permanently shifting 5% of the portfolio from global
    equities to create a new absolute return asset class for
  • Adopting a new asset allocation mix
    to further diversify the portfolio and decrease its stake in the global
    stock market.
  • Launching the Innovations and Risk unit to
    explore new investments such as a macro global hedge fund strategy,
    commodities and microfinance.

As of June 30, 2010, the portfolio holdings consisted of 51.7%
in U.S. and non-U.S. stocks, 22% in fixed income, 14.5% in private
equity, 10.1% in real estate, 0.9% in absolute return assets and 0.8%
in cash. Its five-year strategic asset allocation targets are 47% U.S.
and non-U.S. equities; 20% fixed income; 15% real estate; 12% private
equity; 5% absolute-return strategy for inflation protection, including
hedge funds, infrastructure and commodities; and 1% cash.


Separately, the fund today issued a
applauding financial regulatory reforms, joining with its
partner state pension funds and plan sponsors in applauding meaningful
financial regulatory reforms signed into law today by President Obama.


"We now have in place safeguards to
help prevent a repeat of the 2008 market collapse which has hurt all
investors, large and small," the fund said in a statement.


"We also have tools for investors that
will bring appropriate transparency, accountability, and management of
risk at the corporate level. Regulators and investors must remain
vigilant and alert to restore and maintain the integrity of our capital
markets and the accountability of its participants."

I am
not so sure we have safeguards in place to prevent a repeat of 2008,
but some financial reforms were way overdue. As for CalSTRS's
performance in private equity, lots of opportunities presented
themselves in distressed markets over the past year and to their credit,
they capitalized on them.

launching of the Innovations and Risk unit to explore new investments
such as a macro global hedge fund strategy, commodities and
microfinance is interesting. I wonder if they are going to develop
strategies internally, or farm them out to investment managers.

CalSTRS was not the only California pension
giant reporting their performance. Last week, Calpers
posted its best returns in 3 yrs as markets gain

California Public Employees' Retirement System, America's biggest
public pension fund, said on Thursday its investments earned 11.4
percent for the year ended June 30, marking their best performance since


The Sacramento,
California-based pension fund known as Calpers said in a statement that
over the 12 months ended in June its assets increased to $200 billion.
In the previous fiscal year, Calpers suffered its biggest-ever annual
loss when returns dropped 23.4 percent as markets were hard-hit by the
financial crisis.


Helped by
recovering financial markets, investments in private equities, global
bonds and stocks all delivered double-digit gains, the fund said in a
news release.


"With the exception
of real estate, all of the asset class had positive returns for the
year," said Calpers' chief investment officer, Joseph Dear. "We're
definitely in the recovery mode with the opportunity to capture future
returns because of our long-term investment horizon," Dear who came to
Calpers a year ago to help stabilize investment returns said.


The fund,
whose picks are followed closely in the investment community, said its
investments in stocks gained 14.4 percent as its bond holdings rose 19.5
percent. Private equity funds performed even better, posting a 30.9
percent gain.

Its bets on real
estate, however, soured, falling 37.1 percent.


Calpers also said it is working on a new
plan for how to allocate capital in public stocks, private companies,
bonds and other fixed income, real estate and inflation-linked assets
like commodities, infrastructure and forestland.

Some of those real estate deals are coming back to haunt CalPERS.
Global Pensions reports it's now being
sued by a nonprofit charity
over the release of records concerning
its US$100m investment in a controversial residential property firm.

But despite the terrible performance in
real estate, CalPERS and CaSTRS bounced back, much owing to public
stocks, but also owing to their private equity portfolios which
capitalized on opportunities in distressed markets.

The question now is how will these giants perform in the
next five years? Bouncing back from 2008 lows was the easy part, but
they are still heavily underfunded and need to address their
skyrocketing pension deficits. That's more complicated and will
require tough political decisions ahead.

I think these
giants need to think carefully about a course of action to continue
making money and more importantly, controlling downside risk. Farm out
some funds to top hedge funds, but keep and eye out for smaller talented
managers where you can get more "bang for your buck". Use your size
not to muscle managers on fees, but to leverage off their expertise,
building your own internal absolute return teams. Most of all, make sure
you're paying for alpha, not leveraged beta.

is right about developing their global macro hedge fund portfolio
(hopefully, some of that will be internal). I still think in a low
interest rate environment with lots of uncertainty, there is a premium
for liquid strategies where risk can be controlled more easily.

On Wednesday, Federal Reserve Chairman Ben Bernanke told
Congress the U.S. economic outlook remains “unusually uncertain.” This
simply means that rates will stay low for a protracted period until the
Fed feels the risks of deflation have been completely thwarted. But as
John Makin of the American Enterprise Institute reminds us, the rising threat of
is real, and these pension giants better tread carefully
or risk suffering steep losses in their investment portfolios again.
Let's hope post-2008, they're better prepared for what lies ahead.

***Links to Annual Reports***

Please note annual reports for FY2010 are not
available yet. When they are, you will be able to read CalSTRS's annual
report by clicking
, and CalPERS's annual report by clicking

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ZackAttack's picture

And another thing... if things are so goddamned rosy, how come CALPERS had to go back to the legislature to ask for an additional $600m contribution to make up for their shortfall?

No significance to the source, just the first Goog hit:

They have underperformed the general market for years upon years. Shut down this empire, fire all the parasites feeding on it and hand it over to the goddamned computers.

RKDS's picture

how come CALPERS had to go back to the legislature to ask for an additional $600m contribution

I certainly don't know if this is the case for CA, but maybe the state/legislature skipped or deferred payments in the past and now CalPERS expects them to hold up their end of the bargain?

ZackAttack's picture

My understanding was, the legislature is making up a shortfall in returns. Not coincidentally, I think, the $600m figure is within an eyelash of how much they lost on their idiotic Stuy Town investment. Transitively speaking, the California legislature paid for the poor judgement of Tishman-Speyer and Blackrock. Good thing Blackrock was able to skim all those tens of billions from those Fed MBS purchases last year.

From the article:


The CalPERS board sets a contribution rate that the state has to meet based upon the performance of the fund. The state is required to pay this contribution. The board adopted a smoothing method for contributions to spread out the losses over a longer period of time. Because of this, the state's contribution to CalPERS will increase over the next few years unless stock markets increase significantly from current levels.


As long as the California taxpayers are willing to put up with this, that's their problem. It's all good as long as they don't try to make it a federal bailout.

Leo Kolivakis's picture

Things aren't rosy, far from it, but they did bounce back nicely following the disaster of 2008. The structural problems of pension deficits remain. That's why they asked for additional contributions. Even with the bounce back, these giant pension plans are not out of the woods. Hopefully they are better prepared for what lies ahead.'s picture

Hopefully they are better prepared for what lies ahead.


Dow 28,000,000: The Unbelievable Expectations of California's Pension System


What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 and 28,000,000 by 2099, unrealistic to say the least (3) shortfalls could turn out to be hundreds of billions of dollars

4shzl's picture

Far from rosy = hopelessly underfunded.

Pooh-Bah's picture

"We now have in place safeguards to help prevent a repeat of the 2008 market collapse which has hurt all investors large and small"

I am so grateful and thankful that my leaders have now done away with any future market collapses.  I will sleep soundly tonight knowing we are all in such good hands. Goodnight Barry, goodnight Chris, goodnight Barn.

Muir's picture

Thank you Leo.

I for one am glad Calpers made money.

masterinchancery's picture

I hope they keep making it, since otherwise they will be coming to ask the rest of the country for a bailout.

Kreditanstalt's picture

None of it matters.  They can't make any money in the larger scheme of things. 

These two monster behemoths are so huge that, together with all other major investors, they SWAMP whole markets and entire asset classes.  They eliminate volatility, crush trading volume and drive genuine small speculators out of the markets...

Though nominal earnings in dollars may increase, REAL earnings (valuable to the retiree recipients in terms of maintained purchasing power) will gradually disappear in the years to come...

This pooling of risk for millions of retirees, with the hope of spendable returns all obtained with trillions in the same investment pools, will gradually prove to be an exercise in ultimate futility. 

Price inflation and/or currency devaluation will eat them alive.  Real returns will approach zero and they will never make up any shortfalls.

The whole construct IS a ponzi scheme!  Can anyone out there see that?  Any hope at all for meaningful real returns requires acceptance of greater risks, great nimbleness and a contrarian investing stance.

And a SMALLER scale! 

kaiserhoff's picture

Exactly.  Nothing in California is sustainable in anything like its present form, starting with multi-million dollar boxes made of ticky tacky.

El Hosel's picture

"Last week, Calpers posted its best returns in 3 yrs as markets gain"

   Markets have gained nothing in 12 years for buy and holders.  If you can beat your meat, you can beat the street.... Ponzi scheme, step right up, there is plenty for all.

   "as Markets Gain" = Bullshit.  "The market" no longer gains Leo, please make a note of it.


ZackAttack's picture

Stock holdings earned 14.5 percent and its bonds rose 12.3 percent, the fund reported today. Investments in private equity funds rose 21.7 percent, while real estate fell 12.4 percent.

Meanwhile, the S&P returned 26.46%, long treasuries returned 14.17% and the Vanguard REIT index returned 54.18%.

Dumbfucks. Worse than that, dumbfucks overpaying for underperformance.

With all the millions they pay to financial leeches, how did they do relative to a dead-simple 50/50 stock/bond index allocation? Let me guess... they fucking *underperformed* yet again.

Don't they have ample evidence at this point that they're incapable of outperforming anything, including simple fungi? Why isn't anyone asking these questions in front of the California legislature?

My advice: remove the leeches, fire most of the staff, turn it over to the computers and let them run it for 5 bp a year.

Dr. No's picture

+833,000 (the number of teachers in the pension).

RockyRacoon's picture

When California is doing great it "leads the Nation"!  When it's doing badly it becomes the step-child.  Bad news:  California leads the nation.   Here in the hinterlands we find it takes about 5 years for the California effect to kick in.  I'm getting ready.

ZeroPower's picture

I always buy after these bullshit dips. Step away when Ben speaks, then wait till the close. Good luck to all of you buying SDS or QID, better cover quickly.

Nolsgrad's picture

Leo, still like the solars? what about telecom there? CHTL that thing Tobin Smith likes?