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State pension funds outshine

Foreign stocks, private equity and other risky investments boost CalPERS and CalSTRS.

July 24, 2007|Walter Hamilton | Times Staff Writer

The pension funds for California public employees and teachers posted above-average returns in the last year thanks to large holdings in overseas stocks and private equity, data released Monday showed.

The California Public Employees' Retirement System said its investment portfolio returned 19.1% in the fiscal year ended June 30. The California State Teachers' Retirement System posted a 21% gain.

CalPERS and CalSTRS, the nation's largest public pension funds, outdistanced their peers, according to preliminary data from Wilshire Associates, a Santa Monica-based pension fund consulting firm.

The median one-year return for public and private pension funds was 16.5%, Wilshire said. Public funds larger than $1 billion had a median gain of 18%.

The performance figures are drawn from pension funds that have thus far reported their one-year returns. Final figures are due out next week.

Most pension funds have performed well in the last year, thanks to surges in global stock markets and commercial real estate, said Jim Callahan, head of pension fund consulting at Callan Associates in San Francisco.

In addition, the weak U.S. dollar amplified overseas investment returns, and private equity investments notched strong profits.

"It was a very good environment for pension funds over the last year," Callahan said.

CalPERS and CalSTRS have recorded double-digit advances in each of the last four years. Few experts, however, believe the pension funds can keep it up. Many say the capital markets are due for a breather after such a lengthy run.

"It's inconceivable that we can succeed in the same way going forward," said Russell Read, chief investment officer at CalPERS.

Christopher Ailman, who is Read's counterpart at CalSTRS, said he remained bullish because of heavy buying pressure from investors in China and the Middle East. But he agreed that pension funds would be hard-pressed to match their recent numbers.

"It was downhill and the wind was at our back," he said. "Let's see how we do in a tougher market."

At CalSTRS, returns were amplified by aggressive investment overseas -- in stocks, real estate and private equity, Ailman said.

International holdings accounted for one-third of the portfolio at its height during the fiscal year. Ailman has since cut that to about 28%.

"We were positioned very aggressively in the last few years, and we were rewarded for that," he said.

Most pension funds appear to have relatively little exposure to the market for sub-prime residential mortgages, which is suffering a wave of defaults, Callahan said.

Less than 0.1% of the CalSTRS portfolio is exposed to sub-prime, Ailman said.

The 19.1% gain at CalPERS was its largest in nearly a decade and helped boost its total size to $247.7 billion.

At CalPERS, international stocks gained 29.6%, U.S. stocks were up 20.6%, real estate rose 20.2% and fixed income investments returned 6.7%.

The portfolio at CalSTRS grew to $170.4 billion. The fund's real estate holdings gained 32.9%, international stocks were up 30.2%, U.S. stocks climbed 20.9% and private equity and other alternative assets jumped 27.6%.

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