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CalPERS CIO: Pension fund missed out on some private equity returns in past 10 years

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CalPERS’ new CIO, Nicole Musicco, and staff on Monday took a hard look at the last 10 years of performance and concluded that it wasn’t a pretty picture, despite the pension plan exceeding its benchmark for the 10 years ended June 30.

Among the past missteps reported by staff were that over the 10-year period, the $439.8 billion California Public Employees’ Retirement System, Sacramento, produced returns that were lower than expected and lower than a hypothetical peers, Ms. Musicco told the investment committee Monday.

The pension fund is down $30 billion in the 12 months ended June 30 and closer to $60 billion lower from the end of 2021 to June 30, she said.

The presentation to the committee showed that in the four years ended June 30, 2018, CalPERS’ annualized return expectation used for its 2013 asset liability study was 7.6% compared with a realized annualized return of 5.6%. CalPERS’ actual annualized returns were also lower than the annualized return expectation of its 2017 asset liability management study, 7% expected vs 6.2% realized.

At the same time, CalPERS earned 7.7% for the 10 years ended June 30, which slightly exceeded its 7.6% benchmark but underperformed the 8.9% of a hypothetical peer group portfolio informed by Wilshire Peer Universe data for U.S. pension plans with more than $10 billion in assets.

Ms. Musicco said that during the period CalPERS was underallocated to growth assets of public and private equity, especially private equity which was “really put on hold” between 2009 and 2018, and there was inconsistent commitment pacing, she said. The inconsistent commitment pace to private equity during the period cost the pension fund an estimated $11 billion to $18 billion in missed opportunities for investment returns, she said.

Looking at the 10-year realized Sharpe ratio of 1.0, “it is frustrating or disappointing, it tells me we’re just not getting the return on risk that we should be getting,” Ms. Musicco said.

In real estate, the pension fund’s legacy opportunistic portfolio did not provide sufficient return in exchange for the risk and the overall portfolio lacked the home-country bias of peer group pension plans that would have increased the portfolio’s returns.

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