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June 30, 2007

The Board of Administration of the California Public Employees’ Retirement System:

On behalf of CalPERS Investment Operations, I am pleased to present reports on the pension fund’s investments, California investments, our investment performance, and investment-related fees and costs for the period ended June 30, 2007. This data was compiled by our Investment Operations staff, our pension consultant Wilshire Associates, and our master custodian State Street Bank & Trust. It is presented in accordance with statutes found in the Retirement Law. We voluntarily follow CFA Institute performance and ethics standards.

We earned a 19.1 percent return (net of fees) on our investments for the one-year period ended June 30, 2007, raising our portfolio market value to a record $249.5 billion. For the fourth straight year, annual returns were in the double-digits to raise our 10-year average to 9.1 percent. Total assets increased by $128 billion over the past 10 years.

We exceeded industry benchmarks in almost all major investment portfolios during the fiscal year, topping benchmarks by nearly $3.8 billion after taking advantage of developing market opportunities. Our strategic asset allocation made us well positioned to take advantage of strong capital markets performance, domestically and internationally. Our investment teams and actions by the CalPERS Board also added significant value. At the end of the fiscal year, 59.5 percent of our portfolio was invested in public equity, 24.4 percent in bonds and other fixed income, 8 percent in real estate, 6.7 percent in private equity, and 1.4 percent in cash equivalents.

We continued to invest in the State of California, providing a strong economic boost for California’s growth. At the end of the year, we had more than $26 billion invested or committed for investment in California entrepreneurial businesses, real estate, housing, urban infill, and stocks and bonds in corporations that make California their home. A study performed by the Applied Research Center of California State University, Sacramento found that our investments generated $15.1 billion in California economic activity in calendar year 2007.

We continued to seek out ways to enhance our diversity outreach to emerging investment managers, and remained steadfast in our efforts to find environmental investments aimed at achieving positive financial returns while fostering sustainable growth and sound environmental practices. We also launched new investment options for employees of local public agencies and schools that are closely tied to CalPERS products and proven managers.

And finally, in the area of corporate governance, our annual Focus List called attention to several U.S. companies with poor financial and corporate governance performance. These companies were the focus of our actions in the areas of board independence, executive compensation and the principle of majority vote. Our single most important focus was to advocate for and protect shareowners’ use of corporate ballots to nominate corporate directors.

Russell Read,
Chief Investment Officer