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June 30, 2008

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

On behalf of CalPERS Investment Office, 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 that ended June 30, 2008. Our Investment Office staff, pension consultant Wilshire Associates, and State Street Bank & Trust, our master custodian, compiled this data as required by the Retirement Law.

We incurred a 5.1 percent loss (net of fees) on our investments for the one-year period ending June 30, 2008, reducing our portfolio value to $237.1 billion. Our five-year return was 11.1 percent, compared with the annual actuarial target of 7.75 percent for funding our members’ retirement benefits.

Our Global Equity portfolio was the hardest hit, with fiscal year declines of 12.3 percent in U.S. stocks and 7.8 percent in international stocks. Private Equity (the Alternative Investment Management [AIM] Program) gained 5.8 percent for the year. Our Global Fixed Income investments returned 6.5 percent for the domestic portfolio and 17.6 percent for international, in part because our internal investment management team avoided the sub-prime securities that produced the severe mortgage losses suffered by many other investors. Finally, our real estate assets had a market value decline of 12.6 percent over the fiscal year as the impact of the slowdown in the national housing market and property devaluations set in.

A revised, three-year asset allocation adopted in December 2007 lowered targets and ranges for Global Equity and Fixed Income, raised them for AIM and Real Estate, and created a new 5 percent target allocation for a new Inflation-Linked Asset Class – including commodities, infrastructure, forestland, and inflation-linked bonds.

We continued to invest in the State of California. As of June 30, 2008, we had $24 billion deployed or committed for investment in California entrepreneurial businesses, real estate, urban infill, and stocks and bonds in corporations based in California.

We continued to reach out to emerging investment managers, to explore and advocate environmental investments and sound, sustainable environmental practices. We also expanded investment options for local public agencies and schools employees in our Supplemental Income Program, providing more funds under CalPERS management and new ones that automatically modify asset allocations as participants approach their retirement dates.

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. By the end of the fiscal year, we had voted 7,471 individual global proxies in compliance with our Principles of Accountable Corporate Governance. We filed 32 shareowner proposals and averaged 65 percent support from voting investors.

Looking ahead, we will rely on our size, diversified portfolio, and short-term and long-term strategies to manage going forward.

We see continued opportunities in the environmental arena with long-range commitments of more than $1 billion in clean technology. We may soon reach our five-year goal of reducing real estate partners’ energy use by 20 percent by 2009. We already were more than halfway there in 2007 with a single-year reduction of 13.3 percent.

Despite serious market challenges, CalPERS is resilient. We are well able to meet obligations to members, contracting employers, and investment partners. We have the right people and the right tools to maximize risk-adjusted investment returns through all market cycles, having achieved positive returns for 21 of the past 25 years with an average gain of 15 percent. As the nation’s largest public pension fund, we can weather market storms without having to do widespread selling that might lock in our losses. We will take advantage of good buying opportunities when appropriate that will pay off after the market recovers.

Anne Stausboll
Interim Chief Investment Officer