SACRAMENTO, Calif. — CalSTRS officials are looking to invigorate their $114 billion portfolio, considering everything from increased use of enhanced stock-index strategies to hedge funds.
Officials at the heavily indexed pension fund now are seeking ways to add alpha — positive returns above the market benchmark — to meet the fund's 8% target return assumption.
"It's very tough for us to figure out where we can generate an 8% return, not only in total but in individual asset classes," Christopher J. Ailman, chief investment officer of the California State Teachers' Retirement System, Sacramento, told the system's investment committee on July 7.
The fiscal year ended June 30 was known as "The Year of the Rebound," as U.S. stocks returned more than 30% and international stocks returned more than 50% from the market bottom, CalSTRS staff noted in a memo to the committee.
But long-term expected returns are far more dismal, leaving CalSTRS officials, like those at many pension funds, scrounging for alpha. In fact, CalSTRS officials have dubbed the new fiscal year, which started on July 1, "The Year of Alpha."
With about 70% of its $75.2 billion stock portfolio invested passively, CalSTRS — the third-largest U.S. pension fund — long has relied on market returns for the bulk of its performance.
That high degree of indexation has enabled CalSTRS to rank as one of the least expensive pension funds to operate last year, costing only 8.1 basis points, according to Cost Effectiveness Measurement Inc., Toronto That's second only to the $80.7 billion New York State Teachers' Retirement System, Albany, Mr. Ailman said. But the staff memo noted that CalSTRS' "cost structure could increase by 40% or over $45 million and CalSTRS would still be the second lowest cost fund in the CEM universe."
Sometimes, Mr. Ailman told the committee, "You have to spend more money to make more money."