CalSTRS expands active/passive decision making

CalSTRS will double the ranges of its active/passive global equities allocations in a bid to enable investment staff to allocate funds tactically across active and passive rather than be forced to rebalance to strategic asset allocations.

At the February investment committee meeting, CalSTRS concluded its active/passive review of global equities and fixed income — which took nearly nine months — recommending moving the active/passive bands for the US and non-US segments of the global equity portfolio to 10 per cent, while keeping fixed income at the same ranges.

According to a staff report to the investment committee, endorsed by consultant PCA, staff found the 5 per cent range for the non-US portfolio restrictive during times of extreme market conditions..

The report says during the past 18 months the global equities portfolio has periodically “bumped up” against the current ranges which has the potential to force portfolio movements at points that would not be opportune within the market environment.

“This modest level of increased staff discretion will provide the flexibility necessary for staff to shift assets deliberately rather than having the current ranges dictate asset allocation decisions. The expanded ranges will be an important tool used to add alpha in the global equity portfolio by enabling staff to position the portfolio more tactically which, in turn, will broaden the opportunity set.”

The active/passive study has been presented over three investment committee meetings beginning in September 2009 and the latest presentation included a comparison of how other large plans were positioned.

Information obtained by Pension Data Exchange and from questionnaires sent to peers showed most US equities were passively managed when viewed in aggregate, while public pension funds favoured active management in non-US equities, with almost 75 per cent of the funds having a higher allocation to active than passive.

The global equities and fixed income portfolios make up about 75 per cent of the fund assets.

CalSTRS active/passive mix – global equities

Current range  Proposed range

US passive  65-75%  60-80%

US active  25-35%  20-40%

Non-US passive  45-55% 40-60%

Non-US active  45-55%  40-60%