CalSTRS Investment Return Remains Healthy for a Second Year
The 23.1-percent return marks the best performance since 1986, but 2008 declines remain a concern.
WEST SACRAMENTO, CA – The California State Teachers’ Retirement System (CalSTRS) investment portfolio posted a remarkable 23.1-percent return, the highest in 25 years, to mark the end of the 2010-11 fiscal year.
The 23.1-percent return rate soundly beat the actuarial assumed rate of 7.75 percent. It brought in $29 billion for the fiscal year ending on June 30, 2011. CalSTRS investment portfolio’s market value ending June 30 was $154.3 billion.
This marks the second consecutive year of robust performance, after the fiscal year 2009-10 return of 12.2 percent. However, losses of 25 percent in fiscal year 2008-09 as a result of the world economic downturn remain a lingering drag because the actuarial impact of CalSTRS investment portfolio performance is based on a three-year rolling average. That puts the three-year return, at 0.98 percent, well below the actuarial 7.75 percent rate. When the next actuarial valuation is presented in spring 2012, the CalSTRS funding level will therefore drop below today’s 71 percent, but the most recent 23.1-percent return will help slow the decline.
CalSTRS has fewer options to address its funding shortfall than most other public pensions because the fund cannot unilaterally raise contribution rates. According to state law, only the Administration and the Legislature have the authority to adjust contribution rates paid by teachers, school districts and the state.
“The Administration and Legislature must act to adopt a responsible funding strategy that will uphold the state’s promise to teachers while protecting the General Fund,” said CalSTRS Chief Executive Officer Jack Ehnes. “Without legislative approval for increased contributions, even given this past year’s impressive performance, CalSTRS would need a more than 20-percent investment return each year for the next four years to achieve full funding in 30 years, an impractical expectation.”
Despite the healthy return in 2010-11, June’s stubbornly high unemployment rate, a sluggish housing sector and weak consumer spending, nationally, point to continued challenges for the economy and for investors, highlighting that CalSTRS estimates it cannot invest its way back to financial health. As of June 30, 2010, the gap between the value of the fund’s assets and the value of CalSTRS obligations, or the funding gap, had grown to $56 billion.
“The stock market has rebounded nicely from the economic near-death experience of 2008, but it is far from healthy and it presses the need to put a solid funding solution into place for the long term,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Solid performance in the past two fiscal years puts some wind in our sails, but it doesn’t make up for a lost decade of returns,” Ailman said, referring to the recessions that bookended the decade of the 2000s.
“As a result, we have taken steps to generate returns in response to the financial crisis, such as our temporary shifting of 5 percent of assets from global equities to take advantage of opportunities in distressed markets in fixed income, real estate and private equity. This move alone has yielded returns of about 29 percent since inception, ahead of the equity market over the respective term,” Ailman added.
The other steps the Teachers’ Retirement Board and investment staff took to position the fund for ongoing recovery in the wake of the 2008-09 financial crisis include:
- Expanding target asset ranges to avoid having to sell at a loss.
- Permanently shifting 5 percent of the portfolio from global equities to create a new asset class that protects against inflation.
- Adopting a new asset allocation mix to further diversify the portfolio and reduce its stake in the global stock market.
- Launching the Innovations and Risk unit to explore new investment strategies such as macro global hedge funds, commodities and microfinance.
Fiscal Year 2010-11 Returns by Asset Class
|Asset Class||FY 10-11 Return||Benchmark||Benchmark Return||Over Performance
|Global Equity||31.9%||CalSTRS Global Equity Benchmark||31.4%||0.5%|
|Private Equity||22.5%||Russell 3000 Index ex tobacco plus 300 basis points (lagged a quarter)||20.7%||1.8%|
|Real Estate||17.5%||NCREIF Property Index||16%||1.5%|
|Inflation Sensitive||13.6%||Barclays Global Inflation Linked||15%||(1.4%)|
|Fixed Income||5.4%||CalSTRS Fixed Income Benchmark||4.5%||0.9%|
|Total Fund Performance||23.1||Policy Benchmark||22.2%||0.9%|
On a longer-term portfolio-wide basis, CalSTRS returns were:
- 1.2 percent over three years
- 3.8 percent over five years
- 5.7 percent over 10 years
- 8.1 percent over 20 years
As of June 30, 2011, the portfolio holdings were 53.4 percent in U.S. and non-U.S. stocks, 17.8 percent in fixed income, 14.3 percent in private equity, 12 percent in real estate, 1.8 percent in absolute return assets, and 0.7 percent in cash.
The California State Teachers’ Retirement System is the largest teacher pension fund in the United States. CalSTRS administers a hybrid retirement system, consisting of a traditional defined benefit, cash balance and defined contribution plans, as well as disability and survivor benefits. CalSTRS serves California’s 852,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.