CalsTRS initiates active/passive review

CalSTRS staff will present to the investment committee the first of three reports on the optimal balance between active versus passive in its global equity and fixed income portfolios, a process that will culminate in recommendations for any structural changes in February next year.

This first report, presented this week, aims to initiate the review and discussion of the existing and optimal balance between passive and active management styles across the global and fixed income portfolios, a balance that has changed quite significantly over the fund’s history.

Part two of the report will be presented in November discussing the pros and cons of active versus passive, with the study concluding in February with recommendations by staff and its consultant, Pension Consulting Alliance, for any structural changes based on the results of this study.

When the fund separated its investment function from CalPERS in 1983, it temporarily retained external managers while the internal investment team was being built. Until 1985 the fund’s long-term fixed income assets were being managed by eight external managers, split approximately 75:25 between passive and active.

In 1986 a new asset allocation was set which saw equities move to the predominant asset class at 60 per cent of the portfolio. And within the US equity component an 80 per cent passive management target was selected.

As with other large public pension funds the portfolio has evolved significantly over time, and the number of active managers in the US equity portfolio has steadily increased from five in 1998 to 27 at the end of 2008; the passive/active allocation has remained relatively constant ranging from 80:20 to 70:30.

The passive/active split for non-US equities is about 50:50 with two passive and 18 active managers at the end of December 2008.

Within fixed income the fund splits its allocation between core and opportunistic, with about 80 per cent in the core allocation. The opportunistic strategy currently consists of three core plus managers, four high yield managers, and three specialised managers in high yield bank loans, real estate debt and special situations.

In July the board set a new asset allocation to its target policy, which saw the investments shift slightly to 54 per cent in global equities, 20 per cent in fixed income, 12 per cent in real estate, 12 per cent in private equity and 1 per cent in cash. It is now neutral to the policy benchmarks but it has been underweight global equities for much of the past year.