The latest investment returns from CalPERS, the giant California public pension fund, show that its more complex asset allocation strategy badly trailed the
S&P 500
and a simple 70/30 mix of stocks and bonds in the latest fiscal year.
CalPERS said Wednesday that the fund, which totaled $463 billion on June 30, had a net investment return of 5.8% in the year ended June 30.
The S&P 500 returned 19.5% in the same period while a 70/30 mix of the S&P 500 and the
iShares Core U.S. Aggregate Bond exchange-traded fund
(Ticker AGG) returned about 13%, Barron’s calculated based on Bloomberg data. CalPERS did beat its benchmark, a composite of benchmarks of its various asset classes, which returned 5.5%.
Big university endowment and pension funds, which also have June 30 fiscal years, could report similar returns in the coming months since they have comparable asset allocations with a mix of public stocks and bonds as well as a sizable amount of alternative assets like private equity and credit.
CalPERS is usually among the first big endowments and pension funds to report results for the June fiscal year and thus is a harbinger for the endowment and pension world.
CalPERS and other big endowments and pension funds look little like the portfolios of individual investors that are heavy in U.S. stocks and bonds.
Asked about the underperformance of CalPERS versus the S&P 500 or a 70/30 mix of stocks and bonds, CalPERS Chief Investment Officer Nicole Musicco said on a media conference call Wednesday that it’s satisfied with its asset mix.
A 70/30 mix of stocks and bonds is a good benchmark for CalPERS since it has a roughly 30% fixed-income weighting. It has about 45% in stocks. The rest is in assets like private equity, private debt, and real assets. These asset classes have equity-like risk.
A simpler strategy would have helped CalPERS over the past five and 10 years as well. The pension fund had a 6.1% annualized return over the past five years and 7.1% over the last 10 years. Barron’s calculated the 70/30 stock-bond mix would have returned 9% annually over the past five years and 9.5% in the past 10 years.
Such an allocation likely would have resulted in a funding status better than the actual status of 72% of projected liabilities at the end of June.
CalPERS results were depressed in the latest year by private equity, which declined 2.3%, well behind S&P 500, and real assets at negative 3.1%. Private debt was up 6.5%. Private equity, real asset, and private debt returns are lagged one quarter and should be better when final June 30 results are in due to the market rally in the second quarter. Private equity remains popular among endowments even though higher rates and strong competition for deals are impediments to historically outsize returns.
Simpler, low-fee investment approaches often have been better than the complex, higher-fee strategies pursued by big endowment and pension funds but they are wedded to diversification modeled on the Yale endowment which has generated market-beating returns.
It may be tough to change the endowment and pension-fund mind-set despite often disappointing returns.
Write to Andrew Bary at [email protected]
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