Calstrs May Move 12% of Its Portfolio Into Lower-Risk Assets

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The California State Teachers’ Retirement System, the second-largest U.S. pension fund, will explore moving as much as 12 percent of its portfolio into global stocks, infrastructure and Treasuries in order to diversify and reduce risk, its investment committee voted Wednesday.

Leaders of the West Sacramento-based fund are seeking ways to hedge against volatile stocks that compose more than half its $191.4 billion portfolio after the global financial crisis wiped out more than 10 percent of its value between 2008 and 2010.

The pension fund’s consultants discussed a so-called “risk mitigation strategy” with the investment committee Wednesday, and members ordered the consultants to come up with two portfolio models: one with a such a category and one without. They noted it would take years to develop a new portfolio -- which could equal as much as $23 billion based on Calstrs’ current market value.

“In the beginning and end, it’s all about diversification,” said Allan Emkin, founder of Pension Consulting Alliance. “At the end of the day, this is not an asset class. It’s a diversification strategy.”

Another consultant, Stephen McCourt of Meketa Investment Group, said the biggest downside to the strategy is higher management fees.

Board member Paul Rosenstiel, a former public-finance director at Stifel Financial Corp., questioned why other institutional investors haven’t taken the same approach if it decreases risk without depressing returns. Emkin said some, including endowments, already have.

Market Volatility

The pension gained 4.8 percent for the fiscal year that ended June 30, missing its earnings target amid market volatility that depressed returns.

Pension Consulting Alliance and Meketa recommended strategies to produce steadier returns, including infrastructure investments, moving toward a more global mix of stocks instead of the current bias toward domestic equities and reducing traditional fixed-income investments.

About 57 percent of the fund’s holdings are in stocks, while they account for 67 percent of the risk, according to a report released Wednesday. It is the first of what is planned as a regular series of updates to board members on Calstrs’s risk exposure.

Calstrs needs to earn 7.5 percent on average over time to avoid falling further behind in its obligations to 879,000 current and retired teachers and their families. In June 2014, Governor Jerry Brown signed a bill to close a $74 billion funding gap over 32 years by requiring higher payments by teachers, school districts and the state.

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