Pension Fund Earnings Skyrocket, But Concerns Temper Gains

The nation’s three largest pension funds reported preliminary gains ranging from 17.5% to more than 23% for their fiscal years ended June 30. While the results represent the funds’ best performance in years, fund managers were subdued in their assessments because of current economic uncertainties, and because the returns still were not keeping up with the needs of its members.

Real estate gains for the three funds — California Public Employees’ Retirement System (CalPERS), The California State Teachers’ Retirement System (CalSTRS), and The New York State Common Retirement Fund – were mixed. Real estate returns for the California did not match the overall performance, whereas real estate returns exceeded the New York fund’s overall gain.

CalPERS Reports 20.7% Return

CalPERS, the nation’s largest pension fund, reported a 20.7% return on investments in preliminary estimates for the one-year period that ended June 30, 2011.

“This is our best annual performance in 14 years,” said Rob Feckner, CalPERS Board President. “For the second straight fiscal year, the pension fund exceeded its long-term annualized earnings target of 7.75%.”

The net-of-fees performance was the strongest since the 20.1% return of 1997 and the highest since the 2007-09 recession.

As of June 30, 2011, the market value of CalPERS assets stood at approximately $237.5 billion. A year earlier, the fiscal year ended with $200.5 billion.

Real estate investments yielded a 10.2% return based on numbers only through March 31 (not June 30, 2011).

“Despite the good news, we’re well aware of continuing uncertainties in the global financial markets,” said George Diehr, Chair of CalPERS Investment Committee. “Accordingly, our strategy is accounting for such factors as high unemployment, the depressed housing market, and financial turmoil in Greece and other debt-plagued countries. We’re moving forward with our risk-focused asset allocation strategy and developing new tools to respond to market conditions.”

CalSTRS Earns a 23.1% Return

CalSTRS, the nation’s second largest pension fund, posted a remarkable 23.1% return on its investment portfolio, the highest in 25 years.

The return rate soundly beat the actuarial assumed rate of 7.75%. It brought in $29 billion for the fiscal year ending on June 30, 2011. CalSTRS investment portfolio’s market value ending June 30 was $154.3 billion.

This marks the second consecutive year of robust performance, after the fiscal year 2009-10 return of 12.2%.

Despite the healthy return in 2010-11, June’s stubbornly high unemployment rate, a sluggish housing sector and weak consumer spending, nationally, point to continued challenges for the economy and for investors, highlighting that CalSTRS estimates it cannot invest its way back to financial health.

As of June 30, 2010, the gap between the value of the fund’s assets and the value of CalSTRS obligations, or the funding gap, had grown to $56 billion.

“The stock market has rebounded nicely from the economic near-death experience of 2008, but it is far from healthy and it presses the need to put a solid funding solution into place for the long term,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Solid performance in the past two fiscal years puts some wind in our sails, but it doesn’t make up for a lost decade of returns.”

“As a result, we have taken steps to generate returns in response to the financial crisis, such as our temporary shifting of 5% of assets from global equities to take advantage of opportunities in distressed markets in fixed income, real estate and private equity. This move alone has yielded returns of about 29% since inception, ahead of the equity market over the respective term,” Ailman added.

Real estate investments in FY 2010-’11 yielded a 17.5% return.

New York Pension Fund Earns 14.6% Return

The New York State Common Retirement Fund, the third-largest fund in the nation, earned a 14.6% rate of return for the fiscal year ending March 31, 2011. The estimated value of the fund is $146.5 billion, the highest since the global economic downturn in fiscal year 2008-2009.

“The fund remained resilient during a tough economic period,” said New York State Comptroller Thomas P. DiNapoli. “We’ve come a long way back.”

“There still are reasons to be cautious about the ongoing recovery,” DiNapoli said, “but the results are a good sign that the fund has weathered the worst of the downturn. We’re on the right course.”

Real estate investments yielded a 26.7% return.

Source: CoStar

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