Robust Investment Returns Best in 25 Years

Blog entry Jack Ehnes

With relief mixed with caution, we celebrate the remarkable 23.1-percent investment return, our highest in 25 years. CalSTRS ended the 2010-11 fiscal year with an investment portfolio valued at $154.3 billion. This is up $29 billion from last fiscal year, which posted a 12.2 percent investment return.

Investment decisions make a difference

This second consecutive year of healthy returns is the direct result of stronger financial markets, the leadership of the Teachers’ Retirement Board and decisions by our hard working, experienced investment professionals.

Since the financial crisis hit, we’ve generated returns with such steps as temporarily shifting 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 same period.

Actuarial assumptions paint funding picture

This year’s 23.1-percent investment return soundly beat the actuarial assumed rate of 7.75 percent. However, this good news comes with a sobering realization. One or two years of outstanding investment success does not mean we are closer to solving the problem of CalSTRS unfunded liability of $56 billion.

Recent history is against us. The recessions that began and ended the 2000s left us with a decade of lost returns from which we’re unlikely ever to recover through investment performance alone.

The losses of 25 percent in fiscal year 2008-09 will remain a lingering drag on the CalSTRS funding status. 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 assumed rate of return of 7.75 percent.

Our actuary estimates CalSTRS would have to duplicate this past year’s impressive performance each year for the next four years to achieve full funding in 30 years. This just can’t be reasonably expected given the current state of the global economy and financial markets.

We can’t invest our way out of this problem. It’s going to take action by the Administration and Legislature to adopt a responsible strategy to ensure the stability of the CalSTRS fund.


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