Annual Investment Report

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