CalSTRS is considering a long-term shift in its investment strategy to reduce risk and volatility at the $184 billion fund.
The teachers’ pension fund would gradually shift up to 12 percent of its portfolio, or around $22 billion at current values, away from U.S. stocks and other relatively volatile investments and into safer products such as long-term U.S. Treasury securities and relatively bland infrastructure deals.
The move comes amid considerable stock market volatility in the U.S., China and elsewhere that has cost investors hundreds of billions of dollars worldwide. The CalSTRS portfolio has declined about $7 billion in the past month. But CalSTRS officials said the discussion on asset allocation has been under way since February and is a task the pension fund undertakes every three years.
“There’s no rush, there’s no timeline. This is a big decision,” said Christopher Ailman, the chief investment officer, during an interview with The Sacramento Bee. A decision isn’t expected until November, and Ailman said any changes would take “multiple years” to implement.
“We’re investors with 30 year horizons,” he said. “We don’t spin on a dime.”
Ailman said the idea is to see if the California State Teachers’ Retirement System can dial back its risk profile without sacrificing profit. While conventional wisdom holds that less risk translates into lower returns, Ailman said the pension fund’s consultants are discussing “new investment theories” that are designed to retain profits while tamping down risk.
At an investment committee meeting Wednesday, some CalSTRS board members expressed skepticism about achieving those two goals simultaneously. “There is no free lunch,” said Paul Rosenstiel, a former deputy state treasurer.
Pension consultants said they couldn’t guarantee the plan would work but said their proposals would reduce CalSTRS’ reliance on ever-volatile stocks. “It’s a strategy to get away from equity risk,” Allan Emkin of Pension Consulting Alliance told the committee.
CalSTRS’ official investment forecast calls for an annual return of 7.5 percent; the fund earned 4.8 percent in the just-ended fiscal year, following two consecutive years of double digit returns.
“The portfolio does really well in strong economies,” Ailman said. “The downside is we’ve been really hurt in the last two recessions.” The market crash of 2008 wiped out billions of dollars in CalSTRS’ portfolio, and the Legislature last year authorized significant increases in pension contributions to gradually erase a $70 billion-plus funding gap.
Even with the Legislature’s action, CalSTRS’ investment performance has huge implications for taxpayers and teachers alike. Lower profits would make it harder to wipe out the funding gap and could put pressure on lawmakers to impose additional increases in pension contributions.
The state’s other big public pension fund, CalPERS, has been undertaking a similar study since last summer.
At CalSTRS, strategies being contemplated include a reduction in the stock portfolio, which now takes up 58 percent of CalSTRS’ dollars, and a shift from U.S. stocks toward emerging markets, Ailman said.
Ailman said CalSTRS also is exploring whether to ramp up its infrastructure investments, which include investments in things like airports, bridges and so on. CalSTRS currently has $1.5 billion invested in infrastructure.
“I like to call them nice, boring, steady assets,” Ailman said.
Long-term Treasuries also are being discussed. “U.S. Treasuries are the safe haven for global investments (and) would dampen our risk portfolio,” he said.
In addition, CalSTRS is looking at so-called “global macro” hedge funds, which invest in broad classes of assets and are designed to react quickly to market trends. They are designed to perform well when the stock market is struggling.
The proposed strategies carry risks of their own. Notably, “you increase your management fees,” said Stephen McCourt of Meketa Investment Group, another CalSTRS consultant.