SACRAMENTO, Calif. — CalSTRS could move some $15 billion to overseas equities from domestic stocks if its investment committee approves a proposal to combine the fund's U.S. and non-U.S. equity portfolios into one giant $102.7 billion portfolio and evaluate it using a single global equity benchmark.
The proposal by the $170 billion California State Teachers Retirement System's staff reflects a greater interest by institutional investors to move from a home-country bias and have their equity portfolio reflect the broader global market.
If approved by the Sacramento-based fund's board, the change also would place the fund's 49 active external equity managers, and two passive external managers under the microscope.
CalSTRS officials also will be considering a slew of new investment strategies — including structured products like asset trusts, structured notes, warrants, swaps and portable alpha — if the investment committee moves forward with the 2008-2009 investment plan.
“These types of investments are very risk controlled, easy to move into and out of as needs change and provide a source of guaranteed alpha,” according to the proposal. Staff will also consider an allocation to frontier markets as an added source of diversification for the international equity portfolio.
In December, the $240.7 billion California Public Employees Retirement System, Sacramento, approved a similar move and made plans to invest 50% of its total assets overseas while merging its $79 billion domestic and $51 billion non-U.S. equity portfolios.
The $63.1 billion Washington State Investment Board, Olympia, and the $52.7 billion Massachusetts Pension Reserves Investment Management Board, Boston, both give equal weight to U.S. and non-U.S. equities.
“I think you're going to see more of this,” said Bryan Decker, principal and chief investment strategist at consulting firm Evaluation Associates LLC, Norwalk, Conn. “Clearly the trend over the past five years has been to continue to shift (into overseas markets) across all asset classes,” he said.
As part of implementing the change, which would adoption of the global benchmark, CalSTRS would have to shift 23% of its equity assets from U.S. markets to overseas ones, according to a proposed 2008-2009 investment plan to be discussed at the fund's July 10 investment committee meeting.
Moving more assets overseas is “really reflective of the new world,” said Sherry Reser, spokeswoman at CalSTRS.
As of May 31, CalSTRS invested $67 billion in domestic equity and $35.7 billion in non-U.S. equity.
The move to global equities will provide better access to a wider opportunity set, according to the investment plan outline, written by Christopher Ailman, chief investment officer. Mr. Ailman was traveling and not available for comment. On July 1, the U.S. represented 40.5% of the S&P/Citigroup Broad Market Index, down 14.6 percentage points from five years ago.
Throughout the next year, CalSTRS' staff will try to answer some questions before it moves forward, said Ms. Reser. Among them: What are the risks involved with moving such a large chunk of assets overseas?
“The main sense of risk is volatility,” said Richard Ennis, principal at consulting firm Ennis Knupp + Associates, Chicago. “All empirical data shows you minimize volatility once you hit 50/50 (split between U.S. and non-U.S.),” he said. Ennis Knupp generally recommends such a split to its clients. His firm is in CalSTRS' pool of consultants, but is not the fund's general consultant.
Another concern is currency risk and hedging associated with the change, the proposal notes.
“One of the risks right now is a weak dollar,” said Christopher Meyer, chief investment officer at consulting firm Fund Evaluation Group LLC, Cincinnati. If the dollar starts to strengthen, that could dampen returns from overseas markets, he said. CalSTRS is not among his firm's clients.
Meanwhile, some of CalSTRS' managers might ultimately become casualties of the new global structure. Part of the business plan is to review CalSTRS' external equity managers responsible for some $74 billion in assets.
“The external managers were initially selected to manage portfolios using styles that were different, but complementary, to each other,” according to the proposal. “Staff will be reviewing and evaluating these manager relationships to assure that they are still appropriate in the current environment.”