CalPERS Trust Level Review · (Jan 00-Mar 03)-22% -$78B 52% *Estimate is a one year projection. Assumes starting funding ratio of 71% as of 6/30/2018 and one year growth in liabilities

Item 8a, Attachment 2, Page 1 of 24

CalPERS Trust Level ReviewInvestment Review

Period Ending June 30, 2018

Ted Eliopoulos, Chief Investment Officer

Elisabeth Bourqui, Chief Operating Investment Officer

Eric Baggesen, Managing Investment Director

Investment Committee

August 13, 2018


CalPERS Trust Level Review

Executive Summary• Performance

– Total Fund fiscal year 2018 (FY2018) return was 8.6%

• Public Equity returned 11.5%, contributing 5.6% of total fund return

• All program areas experienced positive performance with Private Equity achieving highest total return of 16.1%

– Total Fund FY2018 excess return was -6 bps

• Biggest contributors to FY excess return were Public Equity (-19 bps), Private Equity (-17 bps), and Real

Assets (+13 bps)

– Affiliate Investment Program returns were in line with their respective asset allocations, largely positive

for FY2018

• Risk

– The plan’s risk is driven primarily by growth assets, with performance closely tied to the equity market

– The current Barra risk model estimate for total plan volatility is 7.6%

• This is a short term estimate indicative of behavior given the current environment. The bigger risk for PERF

remains that of a severe and/or sustained drawdown in global equity markets which would not be predicted by

the model

– Current active volatility estimate is 0.5%, within the 1.5% target



Performance Summary

Funds Managed

Ending

Market

Value

(MM)

Net

Return

Excess

bps

Net

Return

Excess

bps

Net

Return

Excess

bps

Net

Return

Excess

bps

Public Employees' Retirement Fund 351,807 8.6% (6) 6.7% (21) 8.1% (7) 5.6% (115)

Judges' Retirement Fund 40 1.5% 12 0.9% 17 0.5% 12 0.5% 11

Judges' Retirement System II Fund 1,522 7.5% 14 6.2% 23 7.2% 23 6.3% 4

Legislators' Retirement System Fund 114 4.8% 15 4.4% 21 5.2% 29 5.8% 31

CERBT Strategy 1 6,801 8.0% 29 6.4% 42 7.4% 42 5.9% 15

CERBT Strategy 2 1,090 6.2% 35 5.4% 40 6.2% 40 - -

CERBT Strategy 3 395 4.7% 27 4.3% 33 5.1% 42 - -

CalPERS Health Care Bond Fund 443 -0.3% 7 1.8% 3 2.5% 28 4.0% 32

Long-Term Care Fund 4,515 4.0% 8 3.7% 13 4.1% 20 4.4% 14

Terminated Agency Pool 134 2.3% - 3.3% - 3.3% - - -

10-YrAs of June 30, 2018 1-Yr 3-Yr 5-Yr



Note: Actuarial Rate of Return was 7.75% during FYs 2007/8-12/13 and 7.5% for FYs 2013/14-16/17.

The rate is 7.375% for FY 2017/18.

PERF 10 Year Cumulative Returns

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Total Fund Cumulative Returns

Total Fund FY Returns CalPERS Policy FY Returns

Total Fund Cumulative Returns CalPERS Policy Cumulative Returns

Actuarial Rate Cumulative Returns



PERF Short-Term vs. Long-Term Performance

1.0%

-1.8%

-0.5%

5.7%

9.0%

6.7%

5.6%

1.7%

9.3%

8.0%

0.4%

16.1%

11.5%

8.6%

-4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Liquidity

Inflation

Real Assets

Income

Private Equity

Public Equity

Total Fund

1-Year Total Returns 10-Year Total Returns



PERF Policy Benchmark: Expected vs. Realized

*Return and volatility expectations are based on the 2013 ALM cycle capital market assumptions. The range is estimated using arithmetic returns and a 90% confidence level.

-10%

0%

10%

20%

30%

Total Fund Public Equity Private Equity Income Real Estate Infrastructure Forestland Inflation Liquidity

An

nu

aliz

ed R

etu

rn %

2013 ALM Return Expectations vs. 5-Yr Realized Policy Benchmark Returns*



PERF Rolling 5-Year Excess Returns

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

Total Fund Rolling Excess Return

Total Fund 1-Year Excess Return Total Fund Rolling 5-Year Excess Return



PERF 1-Year and 5-Year Excess Returns

(15)

53

(23)

73

(222)

4

(7)

36

36

118

38

(251)

(42)

(6)

-300 -250 -200 -150 -100 -50 0 50 100 150

Liquidity

Inflation

Real Assets

Income

Private Equity

Public Equity

Total Fund

1-Year Excess BPS 5 Year Excess BPS



Excess Returns Attribution (as of June 30, 2018)

Positive contribution from public

assets, predominantly Fixed

Income

Negative contribution from private

assets, predominantly Private

Equity

Negative contribution from

underweights to private assets

requiring proxying with publics

Key 5 Year Excess Return Drivers: Average

Weight in

Plan

5 Year 1 Year 5 Year 1 Year 5 Year

Total Excess Return (bps) (6) (7)

Public Program Contributions (11) 21

PUBLIC EQUITY 52% (42) 4 (19) 3

INCOME 18% 38 73 8 13

INFLATION 6% 36 53 3 3

LIQUIDITY 3% 36 (15) 2 (0)

TLPM 0% (3) (1)

OTHER PLAN LEVEL 2% (1) 3

Private Program Contributions (4) (25)

PRIVATE EQUITY 9% (251) (222) (17) (21)

REAL ASSETS 10% 118 (23) 13 (4)

Allocation Management 9 5

Public Proxy Performance 2 (1) (7)

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.

Program Excess

Return (bps)

Contribution to Plan

Excess (bps) 1

Positive contribution from Real

Assets, Allocation, and Fixed

Income

Negative contribution from Public

and Private Equity

Key 1 Year Excess Return Drivers:



PERF Asset Risk Highlights (as of 6/30/2018)

Total Plan Risk

• The plan’s risk is driven primarily by growth assets and the performance of PERF is closely tied to the equity market

• Over the past 6 months, market volatility increased somewhat, but overall the environment has remained calm by

historical standards

– The Barra risk model’s estimate for total plan volatility is 7.6%. This is a relatively short term estimate indicative of

the plan’s volatility given the current environment. Rapid shifts in volatility regime can occur and would not be

predicted by this model

• The bigger risk for PERF remains that of a severe and/or sustained drawdown in global equity markets. Over the past 20

years, two such events occurred, during which the current portfolio would have lost on the order of $100B. Such losses

today would leave the funded status of the plan around 50%

Active Risk

• Current active volatility estimate is 0.5%, within the 1.5% target. Active volatility provides a quantification of how actual

implementation of the portfolio differs from the policy benchmark

Other considerations

• Well diversified across individual issuers/companies

• Adequate liquidity coverage and modest leverage level

• Counterparty risk remains modest



Publ ic Equity, 48.8%

Private Equity, 7.7%

Income, 22.5%

Real Assets, 10.8%

Liquidity, 3.4%

Inflation, 5.9% Trust Level, 0.9%

Portfolio Allocation

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%Total Fund and Performance Contribution of Growth Portfolio

Rolling 12-Month Returns

Total Fund Growth Portfolio Performance Contribution to Total Fund

Source: BarraOne, State Street Bank

Publ ic Equity,

70.4%

Private Equity, 13.0%

Income, 2.3%

Real Assets, 11.0%

Liquidity, 0.0%

Inflation, 2.7% Trust Level, 0.6%

Forecast Contribution to Volatility

Growth Assets Dominate RiskAs of June 30, 2018



Volatility Estimates Interpretation

Note: This is an illustrative example with CalPERS risk and return capital market assumptions

from 2017 ALM workshop applied to portfolio positions on Jun 29, 2018.

* Most risk models assume that returns are evenly distributed around an average expectation (as shown

above). In the real world, worse outcomes than these occur more frequently than implied by the models.

150

200

250

300

350

400

450

500

550

600Ju

l-10

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Jan-

19

Jul-1

9

Jan-

20

Jul-2

0

PERF

NA

V in

B $

Range of Outcomes Implied by ALM's Capital Market Assumptions

68%

probability*

95%

probability*



Drawdown Risk

Scenario Simulated Impact on Current Portfolio

Simulated Return Gain/LossEstimated Funding

Ratio*

Subprime and Credit Crisis

(Oct 07 – Mar 09)-34% -$119B 44%

Tech Crash and Recession

(Jan 00-Mar 03)-22% -$78B 52%

*Estimate is a one year projection. Assumes starting funding ratio of 71% as of 6/30/2018 and one year growth in liabilities and cash flow

projections as per CalPERS Actuarial Office.

• Looking at how today’s portfolio would have performed during past market events provides an alternate perspective on risk

• While no two market declines unfold in the same way, historical simulation can provide an indication of the magnitude of potential losses



-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

S&P composite declines from all-time highs

Crash of 1929

1937 Fed Tightening

Post-WWII Crash

Flash Crash of 1962

Tech Crash of 1970

Stagflation/ OilEmbargo

Volcker Tightening

1987 Crash/ Program Trading

Tech Bubble Collapse

Global Financial Crisis

Historical Equity Market Drawdowns

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

As of 06/30/18



Updates to Performance and Risk Reporting

• Semi Annual Trust Summary (Eliminating)– Content also existed in either the Monthly Update - Performance and Risk Report

or in the annual program reviews

• Monthly Update – Performance and Risk (Updating)– Consolidates PERF and Affiliate trusts into single report with consistent

presentation

– Adds realized volatility statistics & benchmark descriptions for Affiliate trusts

– Removes asset/liability assumptions as they are included in the annual program

reviews

– Eliminates unnecessary text

– Improves ability to adhere to accessibility standards



Appendix



PERF Asset Allocation

*Interim strategic targets were adopted by the Board and effective April 1, 2018.

Asset Class

As of: June 30, 2018

Current

AllocationGrowth 56.6%

Public Equity 48.8%Private Equity 7.7%

Income 22.5%Real Assets 10.8%

Real Estate 9.0%Infrastructure 1.2%Forestland 0.6%

Inflation 5.9%Liquidity 3.3%Trust Level 0.9%Total Fund 100.0%

Public Equity48.8%

Private Equity7.7%

Income22.5%

Real Assets10.8%

Inflation5.9%

Liquidity3.3%

Trust Level0.9%

Growth

56.6%



PERF Contribution to Return

Asset Class

1-Yr

Average

Weight (%)

1-Yr

Return (%)

1-Yr

Contribution

to Return (%)

Growth 57.3 12.1 6.9

Public Equity 49.5 11.5 5.7

Private Equity 7.8 16.1 1.2

Income 19.8 0.4 0.1

Real Assets 10.6 8.0 0.9

Real Estate 8.9 6.9 0.6

Infrastructure 1.1 20.6 0.2

Forestland 0.6 1.9 0.0

Inflation 7.4 9.3 0.7

Liquidity 4.2 1.7 0.1

Trust Level 0.7 - -0.1

Total Fund 100 8.6 8.6



PERF Asset Liability Management Assumptions

• Expected volatility and return is based on the 2013 ALM Workshop and uses the short-term (1-

10year) expected return from capital market assumptions.

• Data points scaled based on size of assets.

Total Fund

Public Equity

Private Equity

Income

Real Assets

Inflation

Total Fund

Public EquityPrivate Equity

Income

Real Assets

Inflation

-5%

0%

5%

10%

15%

20%

-5% 0% 5% 10% 15% 20% 25% 30%

Ret

urn

%

Volatility %

Return and Volatility (Expected vs 5-Year Realized)

More Risk

Mor

eR

etu

rn



Recent market volatility slightly higher, but still low historically

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%S&P 500 12 m trailing volatility

average

Source: Bloomberg



Volatility estimates vary with models used

Barra Model Used for

Risk Reporting

(Short term)

Estimate from ALM’s

Capital Market

Assumptions

(Long term)

Forecasted

Absolute Volatility - PERF7.6% 11.3%

• Risk models are calibrated with historical data and are especially sensitive to

historical look back period

• Barra’s model used for risk reporting is calibrated from last 1-3 years of data, while

20+ history is used for models utilized for ALM purposes

• Longer term model volatility is higher, reflecting a broader range of market

environments



Equity returns for last two years

600

650

700

750

800

850

900

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Ma

r-1

7

Ap

r-1

7

May

-17

Jun

-17

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun

-18

FT

SE

Glo

bal

Tot

al R

etur

n In

dex

Leve

l



Equity returns for FY 2017-18 - A year of two halves

700

720

740

760

780

800

820

840

860

880

900

Jul-

17

Au

g-1

7

Sep

-17

Oct

-17

No

v-1

7

Dec

-17

Jan

-18

Feb

-18

Ma

r-1

8

Ap

r-1

8

May

-18

Jun

-18

FT

SE

Glo

bal

Tot

al R

etur

n In

dex

Leve

l



0

5

10

15

20

25

30

35

40

45

50

-35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

Fre

qu

en

cy

Annual Net Returns

Normal Curve w/same return and

volatility as actual

Historical Returns Are Not Normally DistributedPERF’s Rolling Annual Returns: Jun 89-Jun 18

Historical

Volatility: 7.3%

Average Historical

Rolling Return: 9.1%

Documents

CalPERS Trust Level Review · (Jan 00-Mar 03)-22% -$78B 52% *Estimate is a one year projection. Assumes starting funding ratio of 71% as of 6/30/2018 and one year growth in liabilities