The most recent investment returns from CalPERS, the prominent California public pension fund, reveal a significant underperformance compared to both the S&P 500 and a simple 70/30 mix of stocks and bonds in the latest fiscal year.
CalPERS announced on Wednesday that their fund, which reached a total of $463 billion on June 30, experienced a net investment return of 5.8% in the year ending June 30. In contrast, the S&P 500 yielded a return of 19.5% during the same period, while a 70/30 combination of the S&P 500 and the iShares Core U.S. Aggregate Bond exchange-traded fund (Ticker AGG) generated approximately 13%, based on Bloomberg data calculations. However, CalPERS managed to outperform its benchmark, a composite of various asset class benchmarks, which returned 5.5%.
Considering that big university endowment and pension funds operate on the same fiscal calendar ending in June, similar returns may be expected in the following months as they have comparable asset allocations involving a mix of public stocks and bonds, along with a significant share of alternative assets like private equity and credit.
CalPERS has historically been one of the first major endowments and pension funds to report results for the June fiscal year, therefore providing insight into the performance of endowments and pension funds industry-wide.
It is worth noting that CalPERS and other large endowments and pension funds differ greatly from the portfolios of individual investors, which tend to be heavily concentrated in U.S. stocks and bonds.
When questioned about CalPERS’ underperformance in comparison to the S&P 500 or a 70/30 mix of stocks and bonds, CalPERS Chief Investment Officer Nicole Musicco stated during a media conference call on Wednesday that they are content with their current asset mix.
The Importance of Asset Allocation
A well-balanced asset allocation strategy is crucial for investment success. The California Public Employees’ Retirement System (CalPERS) serves as a good example, with its 70/30 mix of stocks and bonds. This allocation is particularly effective for CalPERS because it aligns with its 30% fixed-income weighting and approximately 45% allocation to stocks. The remaining portion of the portfolio consists of assets such as private equity, private debt, and real assets, which carry similar risks to equities.
A Simpler Strategy for Better Returns
In recent years, CalPERS could have benefited from a simpler investment approach. Over the past five and 10 years, the pension fund has achieved an annualized return of 6.1% and 7.1%, respectively. In comparison, a 70/30 stock-bond mix would have delivered annual returns of 9% and 9.5% over the same periods.
By implementing such an allocation, CalPERS may have achieved a funding status surpassing its actual status, which stood at 72% of projected liabilities as of June.
Temporary Challenges Faced by CalPERS
CalPERS’ recent performance was negatively impacted by its holdings in private equity and real assets. Both experienced downturns, with private equity declining by 2.3% compared to the S&P 500 and real assets declining by 3.1%. However, it is worth noting that these returns are lagged one quarter and may be more favorable when the final June 30 results are released due to the market rally in the second quarter. Despite these challenges, private equity remains popular among endowments, despite obstacles such as higher rates and intense competition for deals.
Simplicity and Low-Fee Approaches Triumph
Often, simpler investment strategies with lower fees outperform complex strategies pursued by large endowments and pension funds. However, these institutions remain strongly committed to diversification, taking inspiration from the Yale endowment which has historically delivered impressive returns.
Breaking the Mold
Despite sometimes disappointing results, it may be difficult to change the mindset of endowments and pension funds regarding investment strategies. However, reevaluating traditional approaches could potentially lead to improved outcomes.