One of two general investment consultants advising the California State Teachers' Retirement System on a new asset allocation is recommending a major downward shift in the allocation to U.S. equities while increasing emerging markets equities exposure.
Meketa Investment Group said in materials presented to the West Sacramento-based $191.3 billion pension fund's investment committee Wednesday that investment risk decisions can be minimized in CalSTRS' 2016-2019 asset allocation plan without reducing the pension fund's chances of meeting its 7.5% rate of rate of return over the next few years.
Meketa presented five options to the board that all reduce CalSTRS' domestic equity allocation to between 25% and 27% from the current 37%. Developed markets international equity would range between 6% and 21% in the five options from the current 15%.
Meketa is one of two consultants creating an asset allocation plan for the pension fund, along with Pension Consulting Alliance.
PCA offered four investment allocation choices for CalSTRS with different risk/return profiles but did not recommend a particular plan. Two of the four PCA options offer a new risk mitigation asset class that PCA says would offer downside protection. The asset class would invest in long-duration U.S. Treasuries; alternative risk premiums; global macro strategies; and systematic-trend-following investments, which invest in markets that have been rising and short markets that have been falling, betting that those trends continue.
PCA's options also include a new global growth asset class that comprises all public equities and which also includes a suggestion that CalSTRS evaluate its home-country bias for its equity investments. Some of the PCA options also would reduce CalSTRS' reliance on traditional fixed income.
In an unusual experiment, CalSTRS Chief Investment Officer Christopher Ailman recommended to the pension fund's board that both consultants do their own individual studies.
The pension fund's board will examine proposals from both firms and is expected to adopt one of the firms' options in November. The new plan would go into effect next July and go through June 30, 2019.
Meketa is recommending that that 25% of the overall foreign equity exposure be in emerging markets stocks. Currently, CalSTRS has only a 3% allocation to emerging markets equities and 15% in international developed markets.
Meketa recommends maintaining a 13% allocation to private equity but said more of the portfolio should be shifted to debt-focused strategies such as mezzanine debt, distressed debt and senior lending from traditional buyout and venture capital strategies.
It also recommends increasing the infrastructure allocation to 5% from the current 1% in all five options, a task that CalSTRS officials have said in the past could be difficult given the intense competition from other investors.