CalSTRS to vote on tactical asset shift, new “innovation portfolio”

The US$161 billion California State Teachers’ Retirement System (CalSTRS) is set to vote next week on a proposal which would see $6 billion tactically invested in the debt markets, as well as the conception of a new “innovation portfolio”.


CalSTRS’ consultant, Pension Consulting Alliance, has recommended the fund adopt the change as part of a tweaking of the strategic asset allocation.

The investment committee will decide on March 5 whether to accept the new strategic asset allocation, which would see the global equities allocation reduced by 5 per cent ($6 billion), and the assets spread across fixed income, real estate and private equity.

“In the wake of the current financial crisis, staff and PCA have suggested the investment committee consider an opportunistic move into debt instruments that currently offer equity-like returns due to the lack of capital in the financial market,” the board said.

If approved, the fund will invest in “solid securities from distressed sellers”; opportunities in distressed priced debt, high-yield bonds and other categories that have an expected return of 15 per cent or greater.

As a tactical investment strategy, it will only continue to exist as long as the current capital crisis continues.

Approximately $1 billion, already in CalSTRS’ investment holdings, has been earmarked for the program. The existing pipeline of opportunities for consideration is about $3.5 billion.

“Given the unprecedented nature of this recession, staff and PCA believe CalSTRS should not try to pick the bottom in the equity market, but rather shift an allocation from global equity and allocate those assets across the remaining three asset classes to take advantage of the unique opportunity,” the board said.

In addition, the investment committee will vote on a new “innovation portfolio” which would invest in opportunities that fall outside the traditional asset classes currently used by the board.

The proposed allocation would not exceed 1.5 per cent of the total fund, or $2 billion, and would be used by staff to incubate new investment opportunities that could help improve the risk-adjusted returns of the investment portfolio.

The investments within the innovation portfolio would be required to demonstrate success before larger dollar amounts are committed to a specific strategy. Within three years, CalSTRS would decide if a strategy should be dedicated to a new asset class, be included in one of the traditional asset classes, or be terminated.

The minimum return objective for the portfolio is 90-day Treasury Bills plus 300 basis points, and the size of each individual strategy would be limited to a maximum of 0.5 per cent of the total fund’s market value.

CalSTRS plans to revisit the fund’s asset targets and ranges again during its asset liability study this year.

Table: Proposed revised strategic asset allocation

Asset class Allocation weight change Revised allocation weight
Global equity -5% 55%
Fixed income +1% 21%
Real estate +2% 13%
Private equity +2% 11%
Cash 0%