CalPERS PE was top performer in a rough 2018

Private equity was the best performing asset class for California Public Employees’ Retirement System in 2018, returning 12.5 percent at a time when almost all other assets were negative.

The value of CalPERS’s portfolio declined 3.5 percent in calendar 2018, documents released in advance of the pension fund’s February meeting show.

But without PE’s double-digit returns, the decline could have been larger, according to CalPERS’s general investment consultant, Wilshire.

“Riding on an 11-quarter streak of positive returns, CalPERS’ private equity program saw its positive momentum moderated somewhat in the last quarter of 2018,” Wilshire wrote.

“Nevertheless, this program’s 2.1 percent Q4 return continued the trend of producing modest yet steady gains for the system, and once again provided diversification benefit during this volatile period when public equities notably struggled.”

CalPERS’s $27.5 billion PE portfolio is part of the retirement system’s growth asset class, which accounts for $188 billion in public and private equity investments.

The growth asset class declined 6.1 percent overall, with an 8.9 percent decline in the $160.1 billion public-equity portfolio.

Longer term, CalPERS’s PE portfolio has failed to meet its benchmarks for the three-year, five-year and 10-year periods. CalPERS reduced its benchmark target, effective July 2018, to a 150-basis-point premium over a public-market equivalent, down from the previous 300 basis points.

Private equity returned 2.1 percent to CalPERS in Q4 2018, part of a quarter that went worse than expected, according to Wilshire.

Active management was the primary factor that led to the quarter’s relative underperformance, costing 39 basis points in expected return across the portfolio.

While PE posted positive absolute returns, it was part of the overall underperformance in Q4, Wilshire found.

“Almost all of this negative margin was attributed to the soft results of real assets and growth (private equity in particular), as these asset classes’ 4th quarter returns trailed their respective benchmarks by -178 bps and -37 bps respectively,” Wilshire wrote.

For 2018, CalPERS also saw positive returns from its real assets and liquidity portfolios, though neither matched PE.

CalPERS received a 4.2 percent one-year return in real assets, which includes real estate, infrastructure and forestland, and a 2.2 percent return in liquidity.

The $3.8 billion liquidity portfolio consists of highly liquid short-term securities with maturities of less than 10 years, and is 100 percent internally managed, according to CalPERS.

Action Item: Read Wilshire’s report on CalPERS’s recent returns here https://bit.ly/2RVtvSq