The largest U.S.-based public pension funds and endowments saw returns on their overall investment portfolios, including real estate, stocks and bonds, rebound to positive territory in 2010. While real estate returns remained a drag, signs are pointing to a rebound in the coming months.

The nation’s two largest pension funds, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), racked up total returns of 12.46% and 12.7%, respectively, on their overall investment portfolios in 2010.

With $225.7 billion in total assets under management, CalPERS’ results came in just under its target of 13.2%, according to spokesman Clark McKinley. CalSTRS, with $146.4 billion in total assets, outperformed its benchmark by 24 basis points. And though CalPERS’ real estate portfolio saw an overall decline of 5% for the year that ended Sept. 30, 2010, the drop was the smallest since the beginning of the financial crisis.

“During 2010, we reduced portfolio leverage and ended relationships with several real estate partners who didn’t meet our expectations,” says Joseph Dear, CalPERS chief investment officer. “Our current focus is on income-generating properties, and now that we’re beginning to see signs of a rebound in the market we’ll be ready to take advantage of opportunities as they arise.”

CalSTRS saw its real estate investments return a measly .01% in 2010, but positive nonetheless. That is a dramatic turnaround after seeing its real estate portfolio lose 18.7% in the three-year period that ended March 31, 2010.

Despite the overall positive trends, asset values of the majority of U.S. endowment funds still are about 25% lower than they were in June 2007. But at least they appear to be heading in the right direction.

According to Steve Pumper, executive managing director of Transwestern’s investment and asset services group in Dallas, lower capitalization rates in 2010 and 2011 are benefitting institutional owners of core assets. (The lower the cap rate, the higher the purchase price.)

“There is so much capital chasing too few deals. There is a flight to quality, particularly to investment-grade real estate. As a result, those with core assets have seen a significant rebound in values over the last 12 months,” says Pumper.

Cap rates for downtown office buildings ended 2010 at 6.2%, just 100 basis points above the heady levels of 2007, according to New York-based researcher Real Capital Analytics.