Calpers Trust Level Review · CalPERS Trust Level Review . Page 5 of 56 . Economic Trends • Negatives could have larger market impact than positives. Positive . Same Trend Negative

Page 1 of 56

CalPERS Trust Level Review

Period Ending June 30, 2016

Ted Eliopoulos, Chief Investment Officer Wylie Tollette, Chief Operating Investment Officer

Eric Baggesen, Managing Investment Director John Rothfield, Investment Director

Investment Committee

August 2016

1

CalPERS Trust Level Review Page 2 of 56

Executive Summary

Economic and Market Conditions

• US indicators edge toward late cycle performance. Economic policies here and abroad tilt further toward mitigating multiple risks.

Trust Level Performance

• Public Employees’ Retirement Fund (PERF) returned 0.61% for the 1 year period ending June 30, 2016

• Affiliate Plans experienced positive returns ranging from 0.3% to 6.0%

Portfolio Risk

• PERF Portfolio volatility continues to be driven predominantly by

Growth assets

2


Review Outline

I. Economic and Market Overviewi. Economic Environment ii. Market Environment

II. Investment Review i. Performance

ii. Positioning and Risk

3


I. Economics and Market Overview

4


Economic Trends • Negatives could have larger market impact than positives.

Positive Same Trend Negative

- Stronger consumer - Low productivity - US growth weakens

Real consumer spending averaged 3% in 1H16 and Has averaged less than 1% pa during current US GDP growth averaged just 1% in first half and tracking at that or higher in 3Q16. economic expansion vs 2.5% in the last one 1.2% YoY

- Modest improvement in 2Q16 profits - Household incomes and balance sheet - Soft capex

It looks as though 1Q16 profits and sales were at Steady real disposable income drives risk buffer Led by weaker investment in mining sector but now least a temporary bottom and a domestic savings pool for asset markets. others have softened.

- Drag from mining investment set to dissipate - Steady and manageable global trade imbalances - Tight labor markets

Mining activity is so low that it could at worst US deficit in 2-3%/GDP range whilst Euro area, Available persons to fi l l job openings very tight at stabilize. Japan and China all at 2-3% surpluses. 2.4 / exacerbated by skil ls mismatch.

- Reemergence of some inflation - Modest tightening of credit conditions /.

More stable commodity prices, stronger wages / according to the Senior Loan Officers's Survey / (3.6%) and higher core services inflation (3.2%). however corporate borrowing costs remain low.

- Further policy responses abroad - Multiple global economic downside risks

US, UK, BoJ, ECB, BoE, China and othr PacRim all !mongst these / Brexit, faltering Japanese growth stil l in easing mode and China debt

- US borrowing costs remain low - Geopolitical challenges

Arguably US 10yr bond yield is 200 bps lower Trend toward isolationism and protectionism may because of easy policy abroad (+ US HH sector). gather steam

5

-6

-8

-10 M-05 M-06 M-07 M-08 M-09 M-10 M-11 M-12 M-13 M-14 M-15 M-16

R&

D, s

oft

war

e

Capex -10

4

6 .1%expansion avg = 2 10

2 5

0 0

-2

-4 -5

2.2

GD

P1

.2 2.2

C

on

sum

er2

.7

9.1

Eq

uip

men

t-1

.9

3.6

3.5

0.2

St

ruct

ure

s-7

.0

6.7

H

ou

sin

g6

.2

Go

vern

men

t

Fin

al d

eman

d

Exp

ort

s

Imp

ort

s

1st 6 years latest year

-1.2

0.9 2

.0

2.0

5.6

-0.6

5.7

-0.2

• The US economic expansion is now 7 years long.

• The past year has been slower than the first six. Soft business investment and inventory reduction have been key reasons.

US Real GDP Growth US Real GDP Growth By Category 8 15

% saar % pa


US Economic Growth Slows In Past Year

6


Mixed Economic Impact From Lower Oil Prices • Lower Oil prices and higher domestic production have sharply reduced the US’ oil import bill.

• However the ensuing sharp reduction in mining investment hurts GDP.

US Oil Import Bill ($bn) US Capex - Mining Investment 450 421 140 0.3%

398 $bn saar 400

0.2% 352

350 317

120 0.1%

300

100 0.0%

250 -0.1%

200 170 80

-0.2% 150

-0.3% 100 60

50 47

GDP impact %, RHS Level $bn saar -0.4%

0 40 -0.5%

2011 2012 2013 2014 2015 J-M'16 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

7


Domestic Drivers of Growth During Past Year • Household (+3%) – With real disposable income growing strongly,

households have been spending more on electronics, furniture, air

travel, healthcare etc.

• Business (-1%) – Capex softness spreading… mining related, aircraft and heavy machinery. IT and Autos topping out.

• Housing (+6%) – Better household formation and high appetite to

buy have driven a gradual acceleration of building.

• Government (+1%) – Improved State and Local revenues and recent budget agreements have modestly reversed fiscal drag.

(bracketed numbers are estimated real growth rates in the year to June 2016)

8


Household Spending Has Strong Underpinnings • Consumer buying power has been enhanced by strong incomes growth

vs low inflation.

• Unlike the back end of the last expansion, this time householders have

also saved a good portion of their improved incomes.

US - Real Personal Disposable Income US Personal Savings Ratio vs Confidence 8 11 -20

% YoY Divs brought disposable income % of forward

6 0 Stimulus Act rebates

4 20 8

2 40

0 60

5 -2 80

Fiscal cliff

-4 100

Savings Ratio CONCONF (RH, reversed) -6 2 120

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

9


Business Spending Is Cooling Off • Real business capex (ex mining) is operating at a high GDP share.

• However, strong cash reserves and increased corporate borrowing have not been recycled into productivity enhancing investments.

• Surveys suggest that capex going forward will be quite soft.

US Real Business Capex Ex Mining

recessions

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

84 88 92 96 00 04 08 12 16

US Corporate Debt to GDP

grey areas

Phill Fed Intended Capex vs Actual Capex 35 30

%/GDP

20

14%

25

13% 10

15

0 12% 5

-10

-5 11% Philly Fed intended -20

capex, LHS -15

Equipment Investment in -30

Real GDP, YoY, RHS 10%

-25 -40 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

10


Housing is Still An Upside Growth Contributor • Housing remains significantly more affordable than at the peak of the 2000s ‘bubble’.

• Household formation has rebounded to around 1 million per year,

double the rate during the recession but half the rate during the prior

boom.

US Composite Housing Affordability NAHB Housing Opportunity Index Annual US Household Formation 250 7.5 250090

000sShare of homes sold - both

Index = 100 when a median-income family higher % affordable (4Q-4Q) 230 exisining and new - that were

has sufficient income to purchase a 6.5 80 affordable to families earning the 2000median-priced existing home.

median income. 210

5.5 70 1500

1170 avg 190

170 4.5 60 890 avg1000

150 3.5 50

500130

2.5 40 110

Plans to Buy 0lower % affordable Source: NAR (lag 1yr)

90 1.5 30

Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16

74

-99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

1H

16

11


Government – Long Term Challenges for the

Federal Budget • Obligations arising from major healthcare programs and social security

are projected to rise by 5 points of GDP in the next 30 years.

• State and Local Government activity has recovered somewhat.

Fiscal year

-5.0%

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

14A 15A 16 17 18 19 20 21 22 23 24 25 26

Latest CBO Projections on Federal Deficit (%/GDP)

CBO-Jan'15

CBO-Aug'15

CBO-Mar'16

2.9%

8.8%

$bn

18.6

18.8

19.0

19.2

19.4

19.6

19.8

20.0

220

240

260

280

300

Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

State and Local Government Activity

S&L Construction, LHS

S&L Jobs, RHS

$bn

12


US Labor Market is Tightening • The labor market continues to strengthen.

• Although its rate of improvement has slowed as ‘full employment’ is approached.

US Underemployment Rates - (U6) Fed's Labor Market Conditions Index 18 30

includes unemployed but looking, 24

16

economic reasons"

discouraged workers, "marginally attached" and "part timers for 18

grey areas

12 recessions 14

6

12 0

-6

10 -12

8 -18

-24

6 -30 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 D-82 D-86 D-90 D-94 D-98 D-02 D-06 D-10 D-14

13


Tight Labor Market Will Create Some Inflation • Wages growth for individuals has accelerated as businesses are

finding it more difficult to hire and retain workers.

• By later this year the result could well be a meaningful rise in US

headline inflation.

% YoY

1

2

3

4

5

6

-5

0

5

10

15

20

25

30

Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

Wage Tracker vs Small Business Plans To Raise Comp

Small Business Plans to Raise Comp, lead 9-mo, LHS

Atlanta Fed wage tracker, RHS

% YoY

1

2

3

4

5

6

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16

Wage Tracker vs Job Quits

Quits as % of Jobs, lead 6-mo, LHS

Atlanta Fed wage tracker, RHS

Barclays -3

-2

-1

0

1

2

3

4

5

6

Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17

US CPI Inflation

Actual

Model

14


It also Shifts Income Share to Wages and Away

From Profits • Wages share of national income has improved, at the expense of

profits (the latter also impacted by a rising dollar).

• This can have negative effects on business investment and equity

returns.

16% Share of US National Income

68% 16% US: Profits Share vs Real Capex

15% 16% US: Profits Share vs SPX Performance

60%

Profits Wages Profit Share Real Capex YoY, RHS

10%

Profit Share SPX YoY, RHS

40% 14% 14%

5%

13% 65% 20%

12% 0% 12%

-5% 0%

10% 62%

10% -10%

10%

-20%

-15% 8% 8%

-40% -20%

7% 59% 6% -25% 6% -60%

Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16 94 97 00 03 06 09 12 15 94 97 00 03 06 09 12 15

15


Imbalances Manageable but Valuations Challenging Expans ion Length Expans ion Length

4Q01 to 4Q07 73-mo 2Q09 to 2Q16 84-mo

Household Debt %/GDP Household Debt %/GDP

Start 102% Start 128%

End 135% Now 106%

Corporate Debt YoY Corporate Debt YoY

Start 3% Start -1%

End 12% Now 6%

Foreign Trade %/GDP Foreign Trade %/GDP

Start -3.3% Start -2.5%

Peak -6.2% Now -2.8%

Federa l Budget $B Federa l Budget $B

Start +100 Start -1255

End -190 Now -525

Net Worth to Income Net Worth to Income

Start 5.4 Start 5.1

End 6.5 Now 6.4

U-rate U-rate

High 6.3% High 10.0%

Low 4.4% Now 4.9%

CPI Inflation YoY CPI Inflation YoY

Start 1.9% Start -1.4%

End 4.3% Now 1.0%

Potentia l GDP YoY Potentia l GDP YoY

Average 2.75% So far 1.35%

Projected 2.00%

All Nonfinancial Debt to GDP 270%

• US leverage

grey areas remains steady, recessions

230% like the 10 year

expansion in the 190%

1990s.

150% 7.5 10 6 7 yrs yrs yrs yrs

110%

70 74 78 82 86 90 94 98 02 06 10 14

Household Net Worth As Multiple of Disp. Income 7.0 • A year ago, net

6.51

(4Q06) 6.50

(1Q15)

6.5 worth looked 6.14x

(1Q00) 6.40 elevated as an 6.0 (1Q16)

5.5 income multiple,

and has since 5.0

retraced. 4.5

4.0 Mar-70 Mar-78 Mar-86 Mar-94 Mar-02 Mar-10

16

Table 1. Overview of the World Economic Outlook Projections (Percent change unless noted otherwise)

Year over Year

Projections Difference from April 2016

WEO Projections 1/

2014 2015 2016 2017 2016 2017

World Output 3.4 3.1 3.1 3.4 -0.1 -0.1

1.9 1.9 1.8 1.8 -0.1 -0.2 2.4 2.4 22 2.5 -0.2 0.0

Advanced Economies United States Euro Area 0.9 1.7 1.6 1.4 0.1 -0.2

1.6 1.5 1.6 1.2 0.1 -0.4 0.6 1.3 1.5 1.2 0.4 -0.1

-0.3 0.8 0.9 1.0 -0.1 -0.1

Germany France Italy Spain 1.4 3.2 2.6 2.1 0.0 -0.2

0.0 0.5 0.3 0.1 -0.2 0.2 3.1 2.2 1.7 1.3 -0.2 -0.9 2.5 1.1 1.4 2.1 -0.1 0.2

Japan United Kingdom Canada Other Advanced Economies 3/ 2.8 2.0 2.0 23 -0.1 -0.1

4.6 4.0 4.1 4.6 0.0 0.0 Emerging Market and Developing Economies Commonwealth of Independent States 1.1 -2.8 -0.6 1.5 0.5 0.2

Russia 0.7 -3.7 -1.2 1.0 0.6 0.2 1.9 -0.6 1.0 2.5 0.1 0.2 Excluding Russia Emerging

and Developing Asia 6.8 6.6 6.4 6.3 0.0 0.0 7.3 6.9 6.6 6.2 0.1 0.0 7.2 7.6 7.4 7.4 -0.1 -0.1

China India 4/ ASEAN-5 5/ 4.6 4.8 48 5.1 0.0 00

28 3.6 3.5 3.2 0.0 -0.1 Emerging and Developing Europe Latin Amenca and the Canbbean 1.3 0.0 -0.4 1.6 0.1 0.1 Brazil 0.1 -3.8 -3.3 0.5 0.5 0.5

2.2 2.5 2.5 2.6 0.1 0.0 Mexico Middle East, North Africa, Afghanistan, and Pakistan 2.7 2.3 3.4 3.3 0.3 -0.2

Saudi Arabia 3.6 3.5 1.2 2.0 0.0 0.1 Sub-Saharan Africa 5.1 3.3 1.6 3.3 -1.4 -0.7

Nigeria 6.3 2.7 -1.8 1.1 -4.1 -2.4 South Africa 1.6 1.3 0.1 1.0 -0.5 -0.2

Source: International Monetary Fund, July 19, 2016


Global Factors Will Remain a Headwind

• IMF still looks for

solid but

•

unspectacular global

growth.

Downgrade since

April is based on the

unexpected UK

decision to exit EU.

Source: International Monetary Fund, July 19, 2016

17


Brexit Will Compromise European Growth • UK has a 3.5%/GDP deficit in goods trade with the rest of the EU …

but a 1%/GDP services surplus (largely financial services).

• Bank of England report suggests banks have adequate coverage of short term foreign currency liabilities. However, financing future “twin

deficits” will be more problematic.

EU

US

RoW

44%

19%

38%

UK Exports

US

RoW

53%

11%

26%

UK Imports

EU

EU

US

RoW

48%

24%

28%

FDI in the UK

EU

US

RoW

40%

24%

37%

UK FDI Overseas

External

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

07 08 09 10 11 12 13 14 15 16F

UK Twin Deficits (%/GDP)

Fiscal July

-1

2.5 4

-5

-12

-2.5

-14

-47 -50

-40

-30

-20

-10

0

10

Confidence PMI CBI - retail CBI - optimism

UK Post Brexit Survey data

June

18


Absence of Lift-off in Japan Drives Extra Support

• Government implemented more budget and monetary support after

larger mandate from July Upper House election.

• However the economy is struggling and the rebound in the Yen may

reintroduce deflation.

Japan Cycle Indicators Japan Core Inflation vs Exchange Rate 120

1.5 -30

lagging Core CPI, lagged 15-mo 115 1.0 -20

Yen (RHS, reversed)

0.5 -10110 coincident

0.0 0 105

-0.5 10

100

-1.0 20leading

95 -1.5 30

90 -2.0 40 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17

19


China’s additional stimulus keeps debt growth high • China again pulling the debt lever to support Fixed Asset Investment

and Real Estate.

• However debt to GDP continues to rise, especially in corporate sector.

China Fiscal Balance/GDP

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Started

-30

-20

-10

0

10

20

30

40

Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

China Residential Floor Space

Sold

20


The Dollar • The US dollar is now sitting close to its long term average.

• Current account and direct investment deficits are not being covered

by longer term portfolio transactions and are thus dependent on short

term financing flows.

• Slowing improvement in “twin deficits” may cap the dollar’s recovery.

Real Broad Value of the US US Basic Balance * US Dollar vs US Twin Balances 135 200 115 0%

1973:3 = 100 $bn four quarter moving sum

125 -3%

0 105

115

-6%

105 -200 95

long term avg -9%

95

-400 85

85 * Current account + US Dollar (broad, real), LHS -12%

FDI + Net Portfolio Twin Deficits, lead 2 years, RHS

75 -600 75 -15%

Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09 Jan-15 M-91 M-94 M-97 M-00 M-03 M-06 M-09 M-12 M-15 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16

21


Conclusion – Most Likely to Stay in a

‘Challenging Returns’ World DOWNSIDE (30%)

"Bus iness cycle near reversa l "

Slow growth (1.2%) morphs into

recess ion within a year

Wages , $ and energy resume a

dampening efect on profi ts

FOMC pedantic about higher headl ine

inflation and hikes faster

Protectionis t and isolationis t trends in

the US and UK continue, spreading to

core Europe elections/ pol icy

China 's publ ic sector and real estate

s timulus wanes

Excess ive va luation supported by

global l iqudity expans ion gives way.

CENTRAL (55%)

"Chal lenging Returns "

Sti l l in mid to late cycle in US

expans ion, a l lowing 2+yrs more growth

Household sector continues to provide

s trong savings pool to the economy

and financia l assets

The Fed lets a recovery of inflation run

for some time.

Incremental ga ins in the labor market

become gradual ly smal ler.

Hous ing has pos i tive multipl ier effects

into rest of the economy.

Profi ts share of GDP stabi l i zes a long

with the dol lar and energy prices .

Japan, Euro Area, UK, China and other

PacRim a l l s ti l l in eas ing mode

UPSIDE (15%)

"Headwinds recede"

Drags on growth unwind, del ivering a

potentia l doubl ing of GDP growth in

the year ahead

New US Adminis tration unlocks HH

formation and labor force participation

Signi ficantly more fi sca l s timulus .

Poss ible incentives to put corporate

cash to work have sel f ful fi l l ing

impacts on activi ty.

EM cycle turn pos i tive after rebalancing

phase of the past few years .

22


II. Investment Review

23


Performance Summary • Public Employees’ Retirement Fund (PERF) returned 0.61% for the one year period ending June 30, 2016

– Strong returns in Fixed Income (+9.3%) and Real Estate (+7.1%) offset a weak year for public equities (-3.4%)

– Though the year ended relatively flat, the Fund experienced volatility along the way, as global equity markets saw several drawdowns exceeding -10%

• PERF 5-year returns were 6.8%, 10-year returns were 5.1%, and 20-year returns were 7.0%

– Highlighting today’s challenging return environment, Global Equity 5-year returns were 6.1%, below the 2013 ALM assumption of 9.2%

• Relative to benchmark, PERF excess returns were -41 bps this fiscal year; -4 bps for the past three years; and +13 bps for the past five years

– One year excess returns were impacted by Real Estate underperforming its benchmark, contributing -49 bps

– Over three years, public programs contributed +28 bps. Private programs contributed -25 bps from performance relative to their benchmarks and -13 bps from being underweight relative to policy (due to insufficient opportunities meeting our standards). Despite underperforming their own benchmarks, private assets outperformed publics

– Over five years, public programs contributed +24 bps, private programs relative to benchmark contributed -18bps, and underweights to private programs contributed -19bps. The impact of the currency overlay in the benchmark calculation pre-2014 contributed +26 bps

• The Affiliate Plans all generated positive net total returns over 1- through 10-year periods. The plans have tracked their benchmarks closely, with most outperforming slightly

24


PERF Positioning • PERF asset allocation is closely aligned with the 2013 ALM workshop

interim targets

– Starting the year we were slightly overweight Growth, underweight Income,

and underweight Inflation. The Growth/Income positioning detracted from

performance as stocks fell while bonds rallied. The Inflation underweight

helped as commodity prices fell during the year

– We remain slightly underweight to Private Equity and Real Assets relative

to Interim targets. Capital deployment to these assets is constrained by

limited opportunities that meet our underwriting standards

• More than 60% of the portfolio is allocated to Growth Assets; Public

Equity and Private Equity will continue to be the primary contributors

and drivers of performance and risk

25


Trust Characteristics As of June 30, 2016

• Trust Assets Managed $306.3B – PERF $295.1B

– Long-Term Care Fund $4.3B

– CERBT Funds $5.1B

– Judges’ Retirement System Fund II $1.2B

– Health Care Fund $0.4B

– Legislators’ Retirement System Fund $0.12B

– Judges’ Retirement Fund $0.04B

26


PERF Performance Summary

• PERF returned 0.61% for the one year period ending June 30, 2016

• Longer term, PERF generated solid returns over the 5-,10-, and 20-

year periods but fell short of the 7.5% actuarial target

• 10- year and 20-year returns underperformed the policy benchmark,

primarily due to poor real estate returns in the mid-2000’s

1-YR 3-YR 5-YR 10-YR 20-YR

Net Return Net Return Net Return Net Return Net Return

PERF 0.6% 6.9% 6.8% 5.1% 7.0%

POLICY INDEX 1.0% 6.9% 6.6% 6.2% 7.2%

Excess Return (0.4%) (0.0%) 0.1% (1.1%) (0.2%)

27

-

- - -


Affiliate Plans Performance Summary • Affiliate Plans generated positive net total returns over 1-, 3-, 5-, and

10-year periods. Return differences are primarily a function of varying

asset allocations

• Plans have tracked their benchmarks closely and mostly outperformed

1 YR 3 YR 5 YR 10 YR

Net Excess Net Excess Net Excess Net Excess

Defined Benefit Plans Return BPS Return BPS Return BPS Return BPS

JUDGES' RETIREMENT FUND 0.3% 15 0.2% 7 0.1% 3 1.2% 14

JUDGES' RETIREMENT SYSTEM II FUND 1.6% (7) 6.4% 14 6.6% 1 5.6% (5)

LEGISLATORS' RETIREMENT SYSTEM FUND 4.0% (11) 5.6% 24 5.8% 13 6.1% 21

CERBT STRATEGY 1 1.0% 29 6.1% 38 6.0% 19 - -

CERBT STRATEGY 2 2.9% 16 5.8% 30 - - - -

CERBT STRATEGY 3 4.1% 8 5.5% 40 - - - -

CALPERS HEALTH CARE BOND FUND 6.0% (1) 4.5% 43 4.3% 50 5.1% (3)

LONG-TERM CARE FUND 5.5% 27 4.9% 29 4.3% 16 5.0% 13

28

- - - -


PERF Contribution to Fiscal Year Return

Asset Class

GROWTH

PUBLIC EQUITY

PRIVATE EQUITY

INCOME

REAL ASSETS

REAL ESTATE

FORESTLAND

INFRASTRUCTURE

LIQUIDITY

INFLATION

TRUST LEVEL

TOTAL FUND

Average

Weight (%)

62.5

52.9

9.5

19.4

10.7

9.2

0.7

0.8

1.5

5.3

0.6

100

1-Year

Return (%)

-2.6

-3.4

1.7

9.3

6.0

7.1

-9.6

9.0

0.4

-3.6

-3.8

0.6

Contribution

to Return (%)

-1.6

-1.8

0.2

1.8

0.6

0.6

-0.1

0.1

0.0

-0.2

0.0

0.6

• At more than 50% of

the portfolio, Public

Equity was the

primary negative

contributor

• Despite relatively

smaller weights, Fixed

Income and Real

Assets diversified the

fund and delivered

positive overall

performance

29


PERF 10 Year Cumulative Returns

Note: Actuarial Rate of Return FY 2007-12 was 7.75%. FY 2013-16 rate is 7.5%

30


PERF Asset Liability Management Assumptions *

*Expected risk and return is based on the 2013 ALM Workshop and uses the short-term (1-10year) expected return from capital market assumptions; observed risk and return figures are 3 year figures

31


PERF Short-Term vs. Long-Term Performance 1-Year Excess BPS 10-Year Excess BPS 1-Year Total Returns 10-Year Total Returns

PERF

PUBLIC EQUITY

PRIVATE EQUITY

INCOME

REAL ASSETS

LIQUIDITY

INFLATION* N/A

1.7%

-0.1%

7.1%

10.2%

4.7%

5.1%

-3.6%

0.4%

6.0%

9.3%

1.7%

-3.4%

0.6% PERF

PUBLIC EQUITY

PRIVATE EQUITY

INCOME

REAL ASSETS

LIQUIDITY

INFLATION*

(17)

(792)

66

(255)

(32)

(112)

135

17

(518)

(3)

253

58

(41)

N/A

-6% -4% -2% 0% 2% 4% 6% 8% 10% 12% -1000 -800 -600 -400 -200 0 200 400

*Inflation has an inception date of October 2007, therefore 10-

year returns and excess BPS are unavailable

32


PERF Rolling 3-Year Excess Return

33


Excess Returns Attribution As of June 30, 2016 (Annualized)

Average Program Excess Return Contribution to Plan Excess

Weight in (bps) (bps) 1

Plan

5 Year 1 Year 3 Year 5 Year 1 Year 3 Year 5 Year

Total Excess Return (bps) (41) (4) 13

Program Contributions* 3 7 7

PUBLIC EQUITY 52% 58 25 23 31 12 12

PRIVATE EQUITY 12% 253 (81) (88) 19 (12) (15)

INCOME 17% (3) 70 59 1 11 9

REAL ESTATE 9% (557) (112) 29 (49) (10) 2

FORESTLAND 1% (1,247) (1,030) (924) (10) (8) (8)

INFRASTRUCTURE 1% 402 1,005 632 3 6 3

INFLATION 4% 135 103 45 7 5 3

OTHER 1 3 (0)

Allocation Impact* (20) 4 (2)

Private Asset Class "Proxy" Shortfall 2 (21) (13) (19)

27Other/Residual 3 (3) (2) 1 Contribution figures are calculated on monthly basis and aggregated over the respective period. 2 Impact of not obtaining full desired interim policy exposure to private asset classes and proxying these with public assets. Includes the impact of lagged reporting of private asset benchmarks relative to current month reporting of public proxies. 3 Includes impact of 2009-2013 benchmark currency hedge calculation and compounding residual.

* Contribution from MAC and ARS Programs are included in Allocation Impact

34


PERF Asset Allocation As of June 30, 2016

Actual Interim

Allocation Strategic

(%) Target (%)* Variance (%)

GROWTH 60.8% 61% -0.2%

PUBLIC EQUITY 51.9% 51% 0.9%

PRIVATE EQUITY 8.9% 10% -1.1%

INCOME 20.3% 20% 0.3%

REAL ASSETS 10.8% 12% -1.2%

REAL ESTATE 9.3% 10% -0.7%

FORESTLAND 0.7% 1% -0.3%

INFRASTRUCTURE 0.9% 1% -0.1%

INFLATION 6.0% 6% 0.0%

LIQUIDITY 1.5% 1% 0.5%

TRUST LEVEL 0.5% N/A 0.5%

ARS 0.1% N/A 0.1%

MAC 0.4% N/A 0.4%

OVERLAY+TRANS+PLAN 0.0% N/A 0.0%

TOTAL FUND 100.0% 100.0% 0.0%

*Interim strategic targets were adopted by the Board and effective July 1, 2015.

*Volatility numbers are as of 05/31/16

35


PERF Allocation Trend 295.1 Billion

* Trust Level includes ARS, Multi-Asset Class (MAC), Overlay, Transition, and Plan Level Portfolios

36


PERF Risk Highlights Volatility

• Current forecast volatility of 10.3% (vs. 11.9% at last ALM and 9.8% at 12/31/15)

• Current forecast active tracking error of 0.8%, within guidelines

• $14.5b one month Value at Risk (VaR), up $1b from 12/31/2015 due to volatile recent

months in equity markets

• Equity volatility is the primary driver of total volatility

Fundamental

• Well diversified across individual issuers/companies

• Geographically tilted to US

• Liquidity profile & coverage currently adequate

• Counterparty risk remains modest

• Longer term risks covered in individual asset class and program reviews

37


PERF Volatility Profile As of May 31, 2016 • Forecast Volatility of 10.3%, implies 25% chance of

Total Volatility negative plan returns in a given year* 10.3%

Benchmark

Volatility Tracking Error

• Forecast Tracking Error of 0.8% is within guidelines

of less than 1.5%

10.2% 0.8%

* Probability based on a 10.3% standard deviation around a 6.4% expected geometric annual return

(Wilshire return expectation June 2016)

38

Conditional VaR and VaR* ($millions)


Absolute Value at Risk Estimate (1-month) As of May 31, 2016

*1 month, 95% confidence Value at Risk. Conditional Value at Risk measures the mean of the tail distribution beyond the 95% confidence level

39


Growth Assets Dominate Volatility and Return As of May 31, 2016

ARS, 0.0% Portfolio Allocation

Public Equity, Private Equity, 73.9%11.8%

Liquidity, 0.0% Inflation, 2.7% MAC, 0.1%

Forecast Contribution to Volatility

Public Equity, 52.1%

ARS, 0.1% MAC, 0.4% Inflation,

5.8% Liquidity, Real Assets, 9.7%

1.4% Income, 1.8% Real Assets,

10.1%

Income, 21.0%

Private Equity, 9.1%

40% Total Fund and Contribution of Growth Portfolio

Rolling 12-Month Returns 30%

20%

10%

0%

-10%

-20%

-30%

-40% Total Fund Growth Portfolio Contribution to Total Fund

40


Recent Equity Market Volatility

Chart Source: J.P. Morgan Asset Management’s Guide to the Markets, June 30, 2016

41

Full Period Since 1960

% of time market more than 0.43% below peak 77% 71%


Historical Equity Market Drawdowns S&P composite declines from all-time highs

0%

-10%

-20%

-30%

-40%

-50%

-60%

-70%

-80%

-90%

1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Crash of 1929/ Depression

1937 Fed Tightening

Post-WWII Crash

Flash Crash of 1962 1987 Crash/

Financial

Tech Crash of 1970 Stagflation/ Oil Embargo

Volcker Tightening Program

Collapse

Trading Feb 16: -13%

Tech Bubble

Global

Crisis

FY 15/16: Aug 15: -12%

Brexit: -6%

Source: Robert Shiller, Bloomberg, J.P. Morgan Asset Management

42

1987 Crash/

Feb 16: -13%

Collapse

Financial


Regional and Currency Exposures As of May 31, 2016

• Geographically, the portfolio is primarily concentrated in US

• Currency exposure largely follows the geographic mix, with 31%

non-USD exposure

43


Top 20 Issuer Exposure As of May 31, 2016

44


Liquidity Profile As of May 31, 2016

• Most of the fund is invested in liquid assets (~75% could be liquidated in less than a quarter in a normal environment)

Transactional liquidity is estimated for each asset class /strategy based

on the current market environment while also accounting for legal

structures or other factors that may impact liquidity. 45

PERF TACTICAL LIQUIDITY SNAPSHOT

As of June 1,2016

Overnight 2 days - EOMSources:

Sources Total (cash flow in) - $ 2,011.890,675

Uses Total (cash flow out) - $ (2,122,028,824)

Sources in Excess (Deficit) of Uses $ (110,138,149)

Contingency Use* $ (43,098,824)

Total Cash and Cash Equivalents $ 4,115,445.199 $ 4,005,307,050

Liquidity Coverage Ratio 283%* Contingency Use is based on a 10 Day, 99% confidence VaR of derivatives positions + contingent exposure estimates

= a+b

= (a+e)/(b+d)

a

bcd

e


Liquidity coverage

• Current liquid cash and equivalents could cover projected 1-

month cash needs by about 2.8x

46


Counterparty Risk

• Overall counterparty risk levels remain muted

• CalPERS monitors each counterparty individually using a

variety of risk and exposure metrics

47


Appendix

48


Program Role and Scope

Investment Program Strategic Objective

The overall objective of CalPERS’ investment program is to provide

members and beneficiaries with benefits as required by law. This will be

accomplished through a carefully planned and executed long-term

investment program that efficiently and effectively allocates and

manages the assets of CalPERS.

Key Risks and Program Characteristics:

• Broad diversification of assets to minimize impact of individual security

losses

• Prudent risk taking within the context of long-term investment horizon

49


PERF Policy Benchmark CalPERS’ Custom Policy Benchmark

• 5 Policy Asset Classes aligned with Asset Liability

Management Target Weights

Interim Target Weight

Asset Class (Effective 7/1/2015)

GROWTH 61% INCOME 20% REAL ASSETS 12% INFLATION 6% LIQUIDITY 1%

• 14 Individual Benchmarks aligned with Strategies

• Customizations: Tobacco, Firearms, Iran/Sudan, Applies

Emerging Market Principles

50


Investment Model Guiding Philosophy

The Strategic Asset Allocation process seeks to support the long-term health and sustainability of the public pension system by deploying capital across asset classes in a manner that meets the long-term return expectations while taking prudent levels of risk

and balancing the needs of beneficiaries and employer agencies.

Asset Liability Workshop

• Investable Asset Evaluation

• Benchmark Evaluation

• Long-Term Capital Market Assumptions

• Define Investment Constraints

• Portfolio Optimization

Investment Strategy

• Implementation Strategy & Capital Deployment

• Macro Economic Research

• Asset Class Research and Views

• Tactical Positioning

Monitoring and Evaluation

• Capital Market Assumption Evaluation

• Asset Class Evaluation

• Independent Risk and Analytics Engagement

51


Organizational Alignment

Investment Teams Supported by Dedicated Functional Groups

Chief Investment Officer (CIO)

Investment Teams

Chief Operating Investment Officer

(COIO)

Investment Risk and Performance

Investment Compliance

Investment Operations

Team Oriented Approach with Support Areas that act as Key Internal Partners While Maintaining Clear Segregation of Duties

52


S&P Composite Index since 1900

Chart Source: J.P. Morgan Asset Management’s Guide to the Markets, June 30, 2016

53


MAC Partners Performance Summary As of June 30, 2016

2%

4%

6%

8%

10%

4.6%

2.1%

8.0%

Annualized Return

Target Return: 7.5%

2%

4%

6%

8%

10%

12%

14%

6.5% 5.8%

8.9%

Annualized Volatility

Volatility Threshold: 11.76%

0.2

0.4

0.6

0.8

1.0

0.40

0.58

Correlation with Global Equity Benchmark

0%

CalPERS Total Fund

Standard Life

AQR (c)

(a) (b)

0%

CalPERS Total Fund

Standard Life

AQR (b)

(c)

(a)

0.0

Standard Life AQR(c)(b)

CalPERS Total Fund Standard Life AQR

Sharpe Ratio(d) 0.72 0.36 0.90

(a) Source: State Street – Monthly net returns from Nov. 2013 to June 2016 (32 data points) – Fund ID: SJ1CA1

(b) Source: State Street – Monthly net returns from Nov. 2013 to June 2016 (32 data points) – Fund ID: SWTD

(c) Source: State Street – Monthly net retuns from Nov. 2013 to June 2016 (32 data points) – Fund ID: SWUB

(d) Assume the risk-free rate is 0%; 54


Index Returns for a 60% Equity/ 40% Bond

Source: Wilshire Associates Consulting

55


One Year Allocation Contribution to Excess Returns • Net contribution of -20 bps, driven by overweight to stocks (-27 bps)

and underweight to bonds (-5 bps) offset by gains on inflation

underweight (+12 bps)

• Allocation Contribution measures impact of positioning in liquid asset

classes relative to policy targets, adjusted to account for any

underweights in private assets (e.g. target additional Public Equity to

extent that Private Equity is below policy target) Avg

Avg Target (Under)/ Over Benchmark Contribution Program Portfolio

Weight Weight Return (bps) Weight

PUBLIC EQUITY 52.91% 52.32% 0.59% -3.97% (26.6) INCOME 19.39% 20.33% -0.94% 9.31% (4.7) INFLATION 5.31% 6.10% -0.79% -5.00% 11.5 LIQUIDITY 1.52% 1.00% 0.52% 0.19% 0.1 MULTI-ASSET CLASS* 0.41% 0.00% 0.41% -1.18% (0.2) ABSOLUTE RETURN STRATEGIES* 0.19% 0.00% 0.19% -1.67% (0.4) PLAN LEVEL/OTHER 0.02% 0.00% 0.02% - 0.2

Total Allocation Management (20.3)

*Entire impact of ARS and MAC Programs is included in the Allocation process and return.

56

Documents

Calpers Trust Level Review · CalPERS Trust Level Review . Page 5 of 56 . Economic Trends • Negatives could have larger market impact than positives. Positive . Same Trend Negative