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A Golden Year For CalPERS And CalSTRS

California’s two giant pensions blazed ahead of their benchmarks to post fiscal-year returns that each topped 20 percent. The $154.3 billion California State Teachers’ Retirement System, said its 23.1 percent return was “remarkable,” adding that it was its best performance in 25 years. Meanwhile, the $237.5 billion California Public Employees Retirement System posted a 20.7 percent return, the best since 1997.

Together, the two pensions are now $66 billion richer than they were at this time a year ago.

Leading the strong returns were public and private equity investments. For CalPERS, private equity, which accounts for 13.8 percent of its portfolio, returned 25.3 percent for the year, whereas public equities, accounting for 53.4 of the portfolio, returned 30.2 percent. At CalSTRS, private equity, which makes up 14.3 percent of its portfolio, returned 22.5 percent for the year, while public equities, which account for 53.4 percent of the portfolio, returned 31.9 percent for the year.

Despite handily beating their benchmarks, the leaders of CalPERS and CalSTRS were quick to dampen expectations that such robust returns can continue.

“We don’t want people’s expectations to become inflated,” said Joe Dear, CalPERS’s chief investment officer, at a news conference on July 18. “CalPERS is clearly back, but we have a lot of work to do to keep the trend going.” He added that much of the year’s strong performance, especially in equities, can be attributed to federal stimulus, which was now being withdrawn.

CalSTRS was similarly eager to put its performance in context. “Solid performance… puts some wind in our sails,” said Christopher Ailman, the chief investment officer at CalSTRS, in a press release. “But it doesn’t make up for a decade of lost returns,” he said, referring to the financial hole the pension plan found itself in after two recessions over the past 10 years.

Despite its strong performance, CalSTRS said in a statement that it still had a gap of $56 billion between assets and expected obligations, saying it is probable that it “cannot invest its way back to financial health.”

Of deep concern to CalPERS was the possibility of a default on the nation’s debts. In urging Washington to come to an agreement to raise the government’s debt ceiling, Dear said that consequences of not doing so “will be terrible and swift. All investors will be damaged if that happens.”

The two pensions, over the last 20 years, have beaten their long range target returns of 7.75 percent. CalPERS has had a return of 8.4 percent during that period, while CalSTRS has returned 8.1 percent.

Separately, Réal Desrochers, the new head of private equity at CalPERS, said the pension was conducting a comprehensive review of its private equity holdings, which will likely be completed in September. CalPERS currently has more than a hundred private equity relationships and invests in more than 300 funds.

At the pension’s press conference, Desrochers said he was looking to pare down the number of relationships since it produces better results. “Eighty percent of the program’s returns come from just 65 managers,” he said. “It pays to be with the right managers.”

CalPERS, the nation’s largest public pension fund, manages pension benefits for 1.6 million current and former state employees, while CalSTRS manages benefits for 850,000 of the state’s teachers.