Investments

What Are Benchmarks and Why Do They Matter?

The news frequently covers CalPERS’ investment returns, but that’s only part of the way to gauge the portfolio’s performance. It’s important to also look at returns versus the benchmarks.

What is a benchmark?

You may have heard of the term “benchmark” in investing and wondered what it means. Simply put, it is an established target that gauges how well an investment portfolio is performing.

As an analogy, think of someone running a race. Based on their age, running experience, and the difficulty of the course, they might project how long it will take to finish the race. That projected finish time would be their benchmark. If they finish the race faster, they outperform the benchmark. If they finish it slower, they underperform.

In the case of CalPERS, we benchmark the whole portfolio and each asset class. The benchmarks are also broken out by time periods. Just as a runner wouldn’t project the same finish time for a 5k that they would for a marathon, CalPERS has different benchmarks for different lengths of time. We set benchmarks for 1-year, 3-year, 5-year, 10-year, and 20-year periods.

Then we report how well we did against each benchmark in measurement units called basis points (bps). One basis point is equivalent to 0.01%. For example, if our benchmark was 5.25%, but we earned 5.30% that would be reported as +5 bps.

Why are benchmarks good indicators of the health of our fund?

CalPERS tracks investment returns relative to benchmarks to measure performance more accurately. This way we can quantify if our investment strategies are meeting their goals and objectives. Our benchmarks are specific to CalPERS’ portfolio objectives and the risk tolerance set by the CalPERS Board.

That is why performance relative to our benchmark is a good indicator of the health of our investment portfolio. If we are consistently underperforming a benchmark in a specific asset class, we look at how we can adjust our investment methodology to strengthen returns. If we are constantly outperforming, we know we are on the right track and we can seek opportunities to continue to grow.

How did CalPERS perform versus our benchmarks?

At our Investment Committee meeting on February 15, CalPERS team members and the board’s consultants presented the Trust Level Review, which includes a report on performance versus the benchmarks. You can view the full report (PDF), but here is a brief overview of how the portfolio did versus the benchmarks, as of December 31, 2021:

  • For the total fund, CalPERS outperformed the benchmark for the 1-year (+120 bps), 3-year (+39 bps), 5-year (+10 bps), and 10-year (+1 bps) periods.
  • CalPERS only underperformed the benchmark for the 20-year period (-41 bps).
  • For the 1-year return, the strongest performing asset classes were private equity (+792 bps) and real assets (+242 bps).
  • The asset class that most underperformed was real assets for the 20-year period. It was -262 bps. A major contributor to the underperformance is the 20-year time period that includes the great recession, which heavily impacted real estate.

If you’re interested in staying up to date on CalPERS’ investment performance, visit our Investment page. There you will find the most current total market value of the fund, plus links to the asset allocation monthly and quarterly update reports.