While we have often documented the dramatic underperformance by the hedge fund industry over the past decade courtesy of a centrally-planned market in which it no longer pays to "hedge", culminating with countless hedge fund closures and substantial redemptions (mostly by now redundant Fund of Funds managers), today we learn that "vanilla" asset managers were also hurt over the past year in which the S&P went nowhere, and not just in Japan where the gargantuan, $1.4 trillion GPIF recently suffered major losses, but in the US as well.
Case in point: Calpers, the largest U.S. public pension fund which as the WSJ reports posted its lowest annual gain since the last financial crisis due to heavy losses in stocks.
The California Public Employees’ Retirement System, or Calpers, said it earned 0.6% on its investments for the fiscal year ended June 30, according to a Monday news release, barely turning a profit fro the full year. The last time Calpers lost money was during fiscal 2009 when the fund’s holdings fell 24.8%.
It was the second straight year Calpers failed to hit its internal investment target of 7.5%. In 2015, Calpers earned only 2.4%, which suggests that as a result of the dramatic two-year underperformance relative to the funds' own internal target returns, public pensions in California are not only significantly underfunded as of this moment, and getting worse.
Calpers oversees retirement benefits for 1.7 million public-sector workers.
As the WSJ notes, "workers or local governments often must contribute more when pension funds fail to generate expected returns." The problem is when either workers nor local governments can, or want to, contribute more.
Unlike scores of underperforming hedge funds whose primary investors are already wealthy individuals who can weather a down year (or more, in the case of Pershing Square), Calpers’ annual results are watched closely in the investment world. It is considered a bellwether for U.S. public pensions because of its size and investment approach. Many pensions currently are struggling because of a sustained period of low interest rates.
“This is a challenging time to invest,” Ted Eliopoulos, Calpers’ chief investment officer, said in the release. Which is odd, because one look at the ticker shows the S&P trading at all time highs.
The giant California plan ended 2016 with roughly $295 billion in assets, and more than half of those funds are invested with publicly traded stocks. Those investments declined 3.4%, though the performance beat internal targets.
Fixed income produced the largest returns at 9.3%, though the results under performed Calpers’ benchmark. The California retirement giant’s private-equity portfolio posted returns of 1.7%.
Real estate holdings returned 7.1%, but that was below Calpers’ internal target by more than 5.6 percentage points.
Which brings us to a post from two weeks ago, namely BofA's take why bond yields are set to hit record lows after the current hiccup: it has to do with pension fund capital reallocation and disenchantment with the equity asset class, which absent PE multiples soaring to 30x or more, will hardly generate substantial returns from this moment on. As BofA wrote, "treasuries make up nearly 50% of the positive-yielding DM sovereign bonds; curves are 100bp flatter; and there is a greater likelihood that 10y yields probably won’t go back to even 2.5%. We would expect a bigger capitulation by pension managers in the coming months/years."
Ironically, if more of Calpers' assets were invested in Treasuries, it would had an absolutely stellar return courtesy of a record YTD profit generated by longer maturity bonds, especially the 10 and 30Y as everyone rushes to capture whatever yields they can.
The full breakdown of Calpers' returns per its press release, is shown below, where only inflation-linked assets underperformed stocks.
We dread to imagine what will happen to Calpers returns when the S&P actually declines from its all time highs, or when the market is no longer propped up by every single central bank.