CalPERS’ Commitment to Infrastructure (Real Assets Annual Program Review, November 2014)

On November 17, 2014, the California Public Employees’ Retirement System (CalPERS), the largest U.S. public pension fund with approximately $300 billion in assets, conducted its annual real assets program review. CalPERS’ real assets program includes real estate, infrastructure and forestland. According to the presentation by its investment staff, real assets’ 13.4% return outperformed the policy benchmark by 160 bps in 2013-2014 fiscal year. CalPERS’ infrastructure program has focused on both public and private infrastructure primarily in transportation, power, energy and water sectors.

Given the plan’s strong infrastructure returns which have outperformed across measured periods, CalPERS announced that it will add another $4 billion through the next three years to its infrastructure program. CalPERS appears to view an increase in infrastructure investments as one way to achieve its return goal of 7.5%. According to the minutes from the board’s September 17, 2014 meeting, as of July 31, 2014, the total fund has returned 14.05%, outperforming the policy benchmark period by 41 bps. The 3-year return is 10.2% and the 5-year return is at 11.2%. The 10-year return is at 7.3% and the 20-year return of the total fund is 8.3%.

CalPERS sees the role of infrastructure in its portfolio as providing the plan with an ownership risk in essential infrastructure assets and providing predictable returns with moderate long-term inflation protection. In addition, CalPERS believes that infrastructure acts as an economic diversifier of equity risk. Since inception of the program, the IRR has been 17.1%. Strong performance has been driven by all investment modes including direct, separate account investments, and select commingled funds. Its NAV grew 55% from $1.1 billion to $1.8 billion. According to CalPERS, the infrastructure market will continue to be highly competitive for available capital, multi-modal capabilities and cost when it comes to infrastructure investments.

According to the presentation materials, CalPERS’ infrastructure portfolio had a NAV of $1.8 billion as of March 31, 2014, representing 0.6% of the total fund. CalPERS hopes to increase its NAV by 1% interim and 2% long-term.  CalPERS’ recent confirmation of the value of investing in the infrastructure asset class comes on the heels of the board’s September 2014 decision to adopt a new asset allocation mix that reduced risk in its portfolio by eliminating its hedge fund program worth approximately $4 billion.