Europe's debt crisis and slowing global growth held the biggest U.S. public pension fund to a disappointing 1 percent gain in the last 12 months, well below its return target and its hefty 20.9 percent gain the year before.
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The small gain was well below the California Public Employees' Retirement System's new assumed annual rate of return, lowered in March by its board to 7.5 percent from a longstanding 7.75 percent to reflect a more cautious outlook on financial markets.
The fund's assets were worth $233 billion at the end of June. Their value fell in March 2009 to a recession low of about $160 billion from a peak of about $260 billion in October 2007.
"The last twelve months were a challenging period for all investors as the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns," said Joe Dear, chief investment officer of the fund, best known as Calpers.
The California State Teachers' Retirement System also posted a meager return. The fund said on Friday its assets increased in value by 1.8 percent to $150.6 billion in the fiscal year that ended June 30.
"The small gain reflected "volatile and challenging global markets," Calpers' sister fund said in a statement
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Calpers' performance suffered from its significant allocations to U.S. and international public equities. Investments in fixed-income, infrastructure, private equity and, notably, real estate offset their losses.
Despite Calpers' meager gain in the recent fiscal year, Dear said the fund's new 7.5 percent return target is a realistic long-term goal.
The reduced rate is a pressing matter for local governments in California, including financially troubled cities like Stockton and San Bernardino, as it will require them to increase contributions to the retirement system to bolster its funding.
Local governments managing pensions through Calpers will begin making increased payments to the fund in June 2013. Calpers will inform them of the charges this fall.
State agencies and school districts began paying increased contributions this month.
Calpers' staff had initially urged the fund's board to approve a return target of 7.25 percent.
Concerned about the potential financial strain that would impose on state agencies and local governments struggling with lean budgets, the fund's board instead opted for the 7.5 percent target and for phasing it in over two years instead of one.