CalPERS earned a 15.7% net return in 2017, besting its benchmark by 25 basis points, Chief Investment Officer Theodore Eliopoulos said at Monday's investment committee meeting.
Global equity, with a 24% net return, was the strongest performer for the $356.6 billion California Public Employees' Retirement System, Sacramento. The worst-performing asset class was the liquidity portfolio, which returned 1.2%.
For the longer term, CalPERS' portfolio earned an annualized 9% net return for the five years ended Dec. 31, outperforming its benchmark by 19 basis points; for the 10-year period, the pension fund returned an annualized net 4.9%, underperforming its benchmark by 114 basis points.
The best-performing asset class for the 10-year period was private equity with a 9.1% annualized net return. The worst-performing asset class for the 10-year period ended Dec. 31 was the liquidity portfolio, which returned an annualized net 1.1%.
During his presentation to the investment committee, Mr. Eliopoulos acknowledged the recent market volatility that could signal "the beginnings of a market environment that may be shifting."
"But experiencing a 10% drop in the stock market is something that we should expect to see from time to time," he added.
CalPERS' investment portfolio going into 2018 presents "a mixed picture, both positives and challenges looking at attaining our investment objectives," Mr. Eliopoulos said.
The pension fund is 70% funded, and CalPERS officials are projecting lower future returns.
Even so, due to CalPERS' Dec. 21, 2016, decision to lower its discount rate to 7% from 7.5% over three years, pension fund officials are forecasting neutral to positive cash flows from contributions and investment income, which will help the pension fund weather volatile periods, Mr. Eliopoulos noted.
Separately, CalPERS is winding down a corporate governance investment program that is part of the pension fund's $176.4 billion equity portfolio. CalPERS has $100 million in the corporate governance program, and pension fund officials are winding down the portfolio due to concentrated risk and fees, said Dan Bienvenue, CalPERS managing investment director of global equity, in response to a question from Betty T. Yee, who is the California state controller and a CalPERS board member.
"So that is actually one existing partnership with one security. ... We're very patient in finding liquidity events," Mr. Bienvenue said.
CalPERS officials have been able to liquidate the "vast majority" of the portfolio since the end of the year, he said.
Mr. Bienvenue did not identify the remaining manager. Spokeswoman Megan White declined to provide further details beyond the information provided during the investment committee meeting.
In other action, consultant Meketa Investment Group also reviewed CalPERS' $26.7 billion private equity portfolio. The vast majority, 67%, of CalPERS' private equity portfolio is in funds, with 14% in customized separate accounts, 11% in funds of funds and secondaries, and 8% in co-investments and direct investments.
CalPERS' overall private equity portfolio lagged its benchmark in all time periods ended Dec. 31, with an 18% internal rate of return for one year, an annualized 12.6% for five years and an annualized 9.1% for 10 years.
"It's normal for private equity to lag public markets when markets go way up; 2017 can be characterized as a way-up market," said Steven Hartt, principal at Meketa, explaining CalPERS' private equity performance.
CalPERS' private equity investments that are in funds had an 18.7% internal rate of return for the year, while co-investments and direct investments gained 50.4% IRR, custom separate accounts returned 9.6% IRR, and funds of funds and secondaries earned 6.3% IRR for the year ended Dec. 31. For the 10-years ended Dec. 31, private equity invested in co-investments and direct investments earned a 9.7% internal rate of return, funds earned 9.6% IRR, separate accounts gained 8% IRR, and funds of funds and secondaries returned 6.4% IRR. All 10-year returns are annualized.
However, Mr. Hartt said co-investment returns "tend to be lumpy," and 2017 was a strong year for co-investments.
The investment committee also elected Henry Jones to be its chairman and Richard Costigan, vice chairman. In January, CalPERS' board had elected its first female president, Priya Mathur, and chose Rob Feckner as vice president. Mr. Feckner had been board president.