Calstrs to Put $16 Billion Into Lower-Risk Stocks and Treasuries

  • Second-largest pension fund seeks to curb risks after downturn
  • Strategy expected to reduce returns by 0.1 percentage point

The California State Teachers’ Retirement System, the second-largest U.S. pension fund, will sacrifice some gains during boom years for more stability in its $180 billion portfolio by buying more Treasuries and by riding out short-term volatility in stocks.

The fund’s investment committee Wednesday voted to place at least $16 billion, or 9 percent of assets, into a lower-risk category that relies on identifying two- to six-month trends in futures and currencies, as well as Treasuries maturing in 10 years or more. Calstrs also will work to expand stock investments outside the U.S.

A “risk mitigation” strategy would avoid about $2.5 billion in losses during a typical market downturn, while reducing average returns to 8.2 percent from 8.3 percent, according to an analysis by Calstrs staff and consultants.

“In decent economies, we do great,” Christopher Ailman, the fund’s chief investment officer, said during the committee meeting in West Sacramento. “In recessions, our portfolio doesn’t just do poorly, it does terribly. It really does hurt.”

Calstrs officials have been looking at ways to reduce risk since the global financial crisis wiped out more than 10 percent of the fund’s value from 2008 through 2010. It gained 4.8 percent for the fiscal year that ended June 30, missing its earnings target amid market volatility that depressed returns.

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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