The California Public Employees' Retirement System (CalPERS) has recorded an 11.4% return in the year to June 30 despite a 37% fall in its property assets, preliminary estimates have revealed.
The gains exceeded the long-term annualised earnings target of 7.75%, which CalPERS has attained over the past 20 years.
However, over the year the fund's property allocation fell by 37.1%, representing a 1.3% drop in CalPERS' market value, which currently stands at $200bn.
Elsewhere, global fixed income was up 19.5%; private equity up 30.9%; public stocks up 14.4%; commodities, infrastructure, forestland and inflation-linked bonds up a combined 2.7%.
CalPERS chief investment officer Joe Dear said: "The positive returns over the last year are due to many factors, including the stabilisation in the financial industry and the increase in market liquidity. Many asset classes have exhibited strength amid signs of stabilization and recovery in the economy.
"With the exception of real estate, all of the asset classes had positive returns for the year. We're definitely in the recovery mode with the opportunity to capture future returns because of our long-term investment horizon.
"Real estate declines reflect write-offs and deleveraging a portfolio that relied too heavily on borrowing at the peak of the bubble in 2005 and 2006. Our new real estate team has been completely restructuring 24 separate accounts. We're moving back into core properties and accepting managers in whom we have confidence.
"We're letting go underperforming managers and looking for the best possible deals as they become available in a still sluggish market."
The CalPERS board, investment staff and outside consultants are developing a new plan beginning in 2011 for how to allocate capital in public stocks, private companies, bonds and other fixed income, real estate and inflation-linked assets like commodities, infrastructure and forestland.
CalPERS has saved $100m in fee reductions with external managers, eliminated low-performing funds from its portfolios and is developing new risk management tools. It also successfully advocated several federal financial market regulatory reforms aimed at protecting investors, consumers and the economy from future financial crises, it said.
"We're making good progress as we apply the hard lessons of the financial crisis to improving our investment policies, processes and strategies," Dear added.
The top stories this week were the High Court's decision to block the £12bn annuity transfer from Prudential to Rothesay Life, and a separate court ruling that 'raises the bar' for pension rectification exercises.
Guaranteed minimum pension (GMP) equalisation has soared to the top of pension schemes' to-do lists, with 58% stating it is a priority project, research from Equiniti has revealed.
Professional Pensions is holding its defined contribution (DC) conference on 4 September.