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CalPERS, the California Public Employees’ Retirement System, is the nation’s largest pension fund and one of the largest private equity investors in the world. With over two million members relying on its every move, the organization takes its investing very seriously. Its most recent report gives us a window on what is and isn’t paying off for it right now and what investors can learn from tracking this giant’s investing moves.

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Where The Returns Were And Weren’t Last Year

For the past year, CalPERS reported a net return of 9.3% on its investments, which are valued at $502.9 billion. The organization benchmarks to a discount rate of 6.8%, an assumed rate of return, and a policy marker established by the CalPERS Board of Administration. This was an improvement over the past two years. CalPERS invests to support the Public Employees’ Retirement Fund (PERF), which is currently 75% funded.

Where does this massive fund invest? It uses various options, and investors can take away some leanings here. Public equity investments had a 17.5% estimated return, reflecting the buoyant public markets. Over 41% of the fund is allocated here. The fund developed its investment in the private debt asset class in 2022, which performed strongly as well, coming in at 7% but representing less than 3% of the overall allocation. Fixed income, representing nearly 30% of the asset allocation, came in at 3.7%. Private equity is 15% of the allocation and performed strongly with a 10.9% rate of return.

So far, so good, but we drift into negative territory regarding real assets, where CalPERS notched a 7.1% loss. The category represents 13.2% of the asset allocation and includes investments in various real estate projects, infrastructure, and forestland. CalPERS wasn’t alone; downturns in the real estate market have had a negative impact on pension plans around the world.

Where The Money Is Going Next

What’s interesting is that despite the negative results, CalPERS remains interested in real estate projects and is ready to take on more risk. It sees a potential opportunity in the current downturn and recruits more members for its real estate team. Last month, it announced allocating $100 million to Nuveen’s affordable housing fund.

The pension fund also sees tremendous potential in sustainable energy. It plans to invest as much as $100 billion over the next six years and believes it can decarbonize its portfolio and generate returns for its members. Some of that will be related to infrastructure deals and finding climate-centered funds across various asset classes.

A takeaway for investors here is that diversification is crucial for any portfolio. CalPERS allocates a significant portion of its funds to fixed income even though the returns are smaller because it has to deliver dependable returns for investors. However, to satisfy the demands of its increasing member base, the fund must increasingly look toward where the next opportunity lies, even if more risk is involved.

Long-term investors know that one year’s returns don’t tell the whole story. While real estate has had a challenging year, some market watchers see hope on the horizon. In a report earlier this year from The Altus Group, Omar Eltorai, Director of Research, speculated that a valuation bottom may have been reached, which could spark more transactions.  The forecast for a potentially lower interest rate environment should spark a more active real estate market and more investments in new projects.

As CalPERS looks for bigger returns, it plans to switch up some of its allocations, moving toward private markets and trimming its exposure to fixed income and equities as it zeros in on its renewed focus on real estate and sustainability. Investing like the largest pension fund in the United States may not necessarily be a path to immediate riches. Still, CalPERS’ optimism about real estate’s potential returns may cheer some investors.

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