CalPERS Loses Nearly a Quarter of Assets in a Year

A CalPERS press release said it was the most severe single year decline, but even with this decline, its long term 20-year investment return remained positive at 7.75%.

The drop in the fund’s market value of assets is due primarily to the impact of declines in the global financial markets and the liquidity crises that followed worldwide, according to the announcement. “This result is not a surprise; it is about what we expected given the collapse of markets across the globe,” said Joe Dear, chief investment officer.

As of June 30, 2009, the market value of assets stood at $180.9 billion. A year before, CalPERS market value of assets was $237.1 billion, dipped to $160 billion in March 2009, and rebounded by $20 billion in the second quarter.

Changes in the market value of assets reported by CalPERS include:

• Cash returns increased by 1.4%;
• Global fixed income earned 0.6%;
• Real estate was down by 35. 8%;
• Private equity declined by 31.4;
• Public stocks were down over a year ago by 28.5%; and
• Inflation-linked assets (commodities, infrastructure, forestland and inflation-linked bonds) fell 20.9%.

CalPERS notes that real estate and private equity returns reflect market values through March 31, 2009, not June 30, 2009. Pending appraisals in real estate and valuation adjustments in private equity will impact final year end performance.

After noting the asset decline, CalPERS said its efforts to position its portfolio include:

• revising its asset allocation to maintain flexibility to make opportunistic investments in private equity, real estate and infrastructure now and  planning toward a fuller asset allocation and liability review in 2010;
• realigning relationships with hedge fund and private equity partners that can lead to reduced fees, better alignment of interests, and more mutually beneficial long-term relationships;
• engaging in a sweeping board-directed initiative to advance new and innovative methods for risk management across the system's operations;
• searching for and executing opportunistic investments resulting from market dislocations;
• filing a court action to recover losses from structured investment vehicles due to misrepresentation of the quality of the investment instruments by credit rating agencies (see  CalPERS Says Losses Caused by Inaccurate Credit Ratings ); and
• stepping up activism on the federal government front to influence financial market reform, federal regulation, and corporate business practices that will effectively protect investors.

In the press release, CalPERS said its board has recognized the need for eventual employer contribution increases out into the future, and recently adopted a special methodology to schedule employer contributions as a result of the system's single-year market decline of assets. The board adopted a 30-year fixed contribution schedule method for local governments that will cover the funds needed and will not rely on the variable of future investment returns.

A similar proposal for the state will be the subject of a Board of Administration meeting in September, 2009.