By Ed Mendel | 01/07/10 12:00 AM PST

The CalPERS investment portfolio, after losing $100 billion from its peak in October 2007, has rebounded $40 billion since the market low last March and is now about $202 billion.

But a consultant told the CalPERS board last week that the fund’s investment returns, when compared with other large pension funds, ranked in the bottom 7 percent during the last year and the bottom 10 percent during the last five years.

The lagging investment performance was attributed to the unusually large CalPERS investments in two of the riskiest asset classes, real estate and private equity.

If the two asset classes rebound in the next few years, CalPERS returns may get a surge in comparison to the 40 or 50 other large public pension funds with more than $10 billion in investments.

But there are mixed views of private equity, particularly the debt-laden buyouts of companies that have been lucrative in the past, and widespread worry about commercial real estate, where massive amounts of loans are coming due.

CalPERS officials say they have a long-term investment strategy, can handle ups and downs and have had good returns in private equity and real estate over the long run. And comparisons, they note, can be slippery because of the timing of loss write-offs and other factors.

Still, the nation’s biggest public pension fund, an industry leader that has pioneered the move into hedge funds and other non-traditional investments, is not accustomed to being ranked at the bottom in much of anything.

“I’ll be honest — it’s not great,” Michael Schlachter of Wilshire Consulting recently told the CalPERS investment committee as he turned to a page in his lengthy report titled “Total Fund — Universe Comparison.”

A chart shows the top 5 percent of big public pension funds had returns of 13.32 percent or more during the year ending Sept. 30 and 6.2 percent during the previous five years.

Schlacter said CalPERS ranked in the bottom 7 percent during the last year (with a loss of 6.69 percent) and in the bottom 10 percent during the last five years (earning 3.91 percent).

“Your performance for years and years was top 20 or 30 percent up until about 18 months ago,” he told the board. “Things like AIM (private equity) and real estate were really pushing your returns. And now, obviously, you have taken some very, very large hits in those.

“You are extremely overweight in both assets relative to any other large public fund. It’s not only hurting your performance, it’s also hurting comparisons relative to your peers.

“As those markets recover, we expect to see a flip side.– again, a little more aggressive positions, riskier long-term asset classes which normally drive superior results, if and when those asset classes begin to recover.”

Private equity and real estate, a relatively small part of the CalPERS investment portfolio, have already been a well-publicized headache for the big pension fund.

CalPERS announced in October that three private equity firms had given the firm of a former CalPERS board member, Al Villalobos, more than $50 million in “placement agent” fees, presumably for helping them obtain billions in investments from CalPERS.

CalPERS has hired a law firm to conduct a “special review” of the fees paid by its outside money managers. The CalPERS board adopted a fee disclosure policy in June and is pushing legislation to require placement agents to register as lobbyists.

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