CalSTRS’ investment committee approved a new overlay approach to evaluating the risk and volatility of its portfolio.
The new system calls for evaluating risk in a comprehensive fashion across the entire portfolio of the $146.4 billion California State Teachers’ Retirement System, West Sacramento.
Instead of calculating risk by asset class, the new approach would overlay six risk factors against all investments in the overall portfolio, Chief Investment Officer Christopher Ailman told members of the investment committee at their meeting on Thursday.
The new risk factors that will be overlaid on the portfolio are global economic growth rate, interest rate risk, inflation risk, liquidity fluid market, leverage/financing and governance risk.
The approach is a response to the damage inflicted on CalSTRS’ portfolio during the financial crisis; the system’s portfolio lost a quarter of its value in 2008.
Mr. Ailman said new research is now pointing to financial market meltdowns happeningmore frequently. He said while modern portfolio theory identifies diversification as the key to managing risk by using investments that are less correlated, the market declines in 2001 and 2008 showed the theory did not hold up.
The plan approved by the investment committee calls for a more detailed study to be completed in the fall of 2011 by CalSTRS staff and its consultant, Pension Consulting Alliance. No formal date has been set for implementation of the overlay system.
Mr. Ailman also said at the meeting that CalSTRS has reduced the fees it pays to private equity managers by an average of 15% since June 2009.
“We’re trying to drive that lower,” Mr. Ailman said of the fees charged by private equity fund managers. Partly, the fund is trying to make sure it isn’t covering costs that the managers should pay, he said.
“We’re very focused on what expenses the general partner bears as opposed to the limited partners,” he added.
Bloomberg contributed to this story.