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

Pensionomics,
a money-go-round

As debate rages in the US about the generous retirement benefits and high cost of state and local defined benefit (DB) schemes, new research sheds light on the role these funds play in stimulating the economy and creating jobs. Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures looks at the effect of DB

Total cost shakedown at CalPERS

Up to 8.9 basis points will be slashed from the total cost of managing the CalPERS’ investment portfolio in the next three years, under a new investment resource strategy which could also see internal administration costs increase by $6.5 million next year, and internal staff accountable for internal versus external management allocations. The internal investment

ESG almost an afterthought

Only 26 of 4300 companies surveyed by Governance Metrics International (GMI) have a specific clause that measures executive compensation against a sustainability metric, and institutional investors play a pivotal role in transforming this behaviour. Kimberly Gladman, director of research and risk analytics at the governance research company GMI, says investors should set the expectations that

Broader engagement at UNPRI

The United Nations Principles of Responsible Investment (UNPRI) will expand its focus beyond the micro focus of ESG implementation for its signatories to include thought-leadership research and public and policy debate, writes Amanda White. James Gifford, executive director at UNPRI, said the new strategy came out of its board meeting last week in Australia and

Are hedge fund investors getting what they paid for?

Alternative hedge fund beta allows investors to access the returns generated by hedge funds without the pressures of finding alpha, says Fama family professor of finance at the University of Chicago Booth School of Business, Tobias Moskowitz. Moskowitz says there are three components to hedge fund returns: unique alpha, traditional market beta, and “something else”,

Fund collaboration first step to joint investment

European pension fund service providers PGGM and PKA have agreed on an innovative knowledge exchange that eventually aims to look for joint investment opportunities as well as improving the way the funds conduct risk management and the benchmarking of investments, costs and socially responsible investing.mrec4inarticleinline Sponsored Content scnative1 scnative2 scnative3

Previous