Annual Investment Report

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Summary of Investments as of June 30, 2015 Introduction Chief Investment Officer's Letter Cash Equivalents Domestic Cash Equivalents International Currency Equity Domestic Equity International Equity Domestic REITS International REITS Debt Securities U. S. Treasuries & Agencies International Sovereign Debt Securities Foreign Issued - USD Denominated Mortgage-Backed Securities Mortgage Loans Asset-Backed Securities US Corporate Bonds International Corporate Bonds Derivatives Real Estate Private Equity Infrastructure Forestland
Chief Investment Officer’s Letter December 31, 2015 On behalf of CalPERS Investment Office, I am pleased to report on CalPERS’ investment performance, operations, and initiatives for the one-year period ending on June 30, 2015. The CalPERS Public Employees’ Retirement Fund (PERF) earned a time-weighted rate of return of 2.4 percent this fiscal year, with the ending market value of assets at $301 billion. Although the fiscal year return rate was not as strong as previous years, the three-year return of 10.9 percent and five-year return of 10.7 percent exceeded policy benchmarks by 59 and 34 basis points, respectively. This marks the first time since 2007 that the CalPERS portfolio has performed better than the benchmarks for these periods, and indicates the work undertaken over the past several years to restructure the investment portfolio and reduce costs and complexity is bearing fruit. Fund performance this fiscal year was affected by the impact of tepid global economic growth and increased shortterm market volatility. The strong performance of the U.S. dollar against most foreign currencies also limited returns in international investments. However, the overall performance was helped by the recent strength of CalPERS’ Real Assets program, which made up 11 percent of the fund as of June 30, 2015. Investments in income-generating properties like office, industrial and retail assets, as well as infrastructure and forestland, returned 12.4 percent, outperforming the Pension Fund’s real assets benchmark by 90 basis points. Several significant accomplishments were achieved this year to ensure the long-term sustainability of our investment operations and portfolio. First, as guided by our Investment Beliefs, we have continued to examine the portfolio to ensure its efficient management, and to look for ways to reduce risk, complexity and costs. During the 2014-15 fiscal year this was witnessed by the elimination of CalPERS’ hedge fund program, and through the diligent work to negotiate more favorable terms for CalPERS with our external managers. In the 2014-15 fiscal year we saved $217 million from these and other efforts. To continue these initiatives during the next five years, we announced our new Investment Office’s 2020 Vision strategic plan. The significant element of the plan calls for the reduction of the number of external investment managers CalPERS uses, from the current approximately 200 to approximately 100 by the year 2020. We anticipate having fewer, but larger, commitments with the remaining managers. This will lead to better alignment of interests between CalPERS and its managers and additional leverage to negotiate better terms, both potentially leading to improved performance. CalPERS continues to make great strides in its work on environmental, social, and governance (ESG) issues. Significant progress was made this proxy season as we voted to improve the rights of shareowners by supporting proxy access proposals at 92 companies. In addition, CalPERS continued its ESG leadership role by signing the Montreal Carbon Pledge to map the carbon footprint of our equity investments, and through participation in the United Nation’s Climate Change Conference. CalPERS remains committed to our emerging manager programs and has nearly $12 billion invested with more than 390 emerging managers. We announced a new commitment for what we are calling Transition managers – managers that are successful in our emerging manager programs, or managers new to CalPERS, but that are not yet ready for the size of a commitment normally given to a more established manager. We continue to seek new opportunities through events such as the Emerging and Diverse Manager Day, and the 2014 Emerging and Diverse Manager Forum. In addition, we released our second annual report on the work we have completed to date as part of our Emerging Manager Five-Year Plan. We continue to invest in California. CalPERS has $26.6 billion invested in the state across all asset classes. These commitments support millions of local jobs, contribute to major infrastructure projects and support business expansion efforts. CalPERS is a long-term investor. Our focus is the success and sustainability of our system over multiple decades. While the 2014-15 fiscal year did not produce a return in line with the high returns we have realized in previous fiscal years, we are proud of the success of our Real Assets program, and of the long-term progress of the fund, as measured by the three- and five-year performance numbers. We are reassured by our 20-year investment return of 7.76 percent – exceeding the 7.50 percent discount rate established by our Asset Liability Management (ALM) process. Our Investment Office staff, the Board’s pension consultant Wilshire Associates, and State Street Bank & Trust, our master custodian, compiled the investment data presented on the following pages. Ted Eliopoulos Chief Investment Officer
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California Public Employees’ Reti
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Annual Investment Report

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