CalSTRS considers
asset risk factors

The $152.5-billion Californian State Teachers Retirement System (CalSTRS) is undertaking an asset-allocation review that will consider the underlying risk factors of assets for the first time.

Chris Ailman, chief investment officer of CalSTRS, says the fund is in the middle of an asset-allocation study, which would likely take six months, and would take a different tack.

In the past the fund has only considered capital-market mean optimisation in making asset-allocation decisions, but now it will look at allocations according to risk factors as well.

“We will look at the drivers of risk – including inflation, interest rates and GDP – and what the fund is willing to include and exclude. We will optimise our allocations from a capital and risk perspective,” he says.

“If it reaffirms that we’re taking the right level of risk and return, then that is enriching the decision-making,” he says.

 Watching its weight

Sponsored Content

Ailman says the fund is adding points of view to the asset-allocation study and, at a recent board meeting, had an “interesting debate” on whether the goal of the portfolio was to make money or not to lose money.

“Capital-market theory and mean optimisation calculates risk by only one-term standard deviation, but it is much more complex than that. We apply so much math to investments because we want it to be a science, but it’s an art, and requires judgement.”

CalSTRS also makes tactical asset-allocation decisions and this week was due to hold a TAA meeting with one decision on the table: whether to go overweight the US.

At the moment the fund is neutral US, underweight Europe and underweight fixed income.

It has an automatic rebalancing process when allocations exceed the ranges, and Ailman says the question becomes when to rebalance and by how much.

“We are trying to build out an overlay portfolio with focus on left-tail risk,” he says.

Acknowledging inflation as a risk

Ailman’s view is that the biggest bubble in investments is fixed income, and acknowledging inflation as a risk is missing in most portfolios.

CalSTRS will look to expand its inflation-hedging portfolio among a basket of investments, including treasury inflation-protected securities and infrastructure.

The fund currently has a lot of growth assets, with 50.7 per cent in global equities and 14.5 per cent in private equity.

It also allocates 18.4 per cent to fixed income, 14.2 per cent to real estate, 1.6 per cent to cash, 0.2 per cent to inflation and 0.4 per cent to an overlay.


Leave a Comment

Sort content by

Studying the active management environment

In this timely analysis, Wurts & Associates examines the active management environment, warning investors of the pitfalls of studying and choosing active managers including a reminder that reaching for high levels of benchmark relative excess returns can be potentially rewarded, but only in a marginal way relative to lower tracking error managers. It also concludes

Recovery “square root” says Russell

It will be just as important for investors to be patient in 2010 as it was in 2009 according to Russell Investments, as the year will be dominated by a series of macro themes causing spikes in asset return volatility. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Financial services firms banish short-term bonuses: survey

Financial services firms are responding to the perceived negative impact of their remuneration practices by changing the mix of pay, moving emphasis away from short-term incentive schemes in favour of salary, according to a global survey of more than 60 organisations by Mercer. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Pensions for all in UK market’s big DC shift

Now that automatic enrolment has become the centrepiece of UK pension reform, decent retirement incomes should no longer be exclusive to company veterans and the well-off. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

CalPERS’ new sec lending risk controls

CalPERS has made some significant changes to its securities lending policy document in order to reduce risk and improve counterparty diversification in the portfolio, including a reduction in the maximum exposure to any counterparty, from 30 to 25 per cent of the total program.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Lawmakers gun for OTC deals

While regulatory reforms can introduce improvements to complex investment products such as standardisation, Dr Arjuna Sittampalam, Research Associate with EDHEC-Risk Institute and Editor, Investment Management Review, argues an increased suppression of complexity could be unfortunate, particularly as pension funds begin to take to derivatives in a big way. mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Previous