Members of the California State Teachers' Retirement System investment committee will begin reviewing proposals later this fall that attempt to put the brakes on risk, a shift they hope will stabilize assets in the event of another major market meltdown.
Officials at the $191.3 billion West Sacramento-based fund could decide not only to reduce domestic equity exposure by more than 10 percentage points, but also whether billions of dollars should be invested in a new strategy combining Treasuries and alternative investments such as hedge funds.
CalSTRS already has a small, $2.5 billion, innovation and risk portfolio that includes $874 million in hedge funds, but changes suggested by consultants could expand that allocation greatly.
Equities make up about 57% of CalSTRS' total assets and 67% of the risk, CalSTRS documents show.
The new asset allocation proposals come amid tumultuous equity markets and capital market assumptions that predict a difficult environment over the next decade in achieving expected returns. In addition to CalSTRS, other big pension plans — including the nation's largest, the $292.88 billion California Public Employees' Retirement System — are moving to retool their portfolios to trim risk.
Steve Carlson, Chicago-based head of investments for the Americas at Towers Watson & Co., said public pension plans increasingly are following the lead of corporate plans, many of which began reducing equity exposure after the financial crisis in order to limit losses in case of an equity downturn. In turn, the plans are adding alternative beta to serve as a diversifier.
“They don't want to have all their eggs in one basket,” Mr. Carlson said.
CalSTRS returned 4.8% for the fiscal year ended June 30 and has an assumed rate of return of 7.5%. But because of losses during the financial crisis, projections had indicated the fund could run out of money by 2045, even if it met its expected rate of return each year. (CalSTRS lost about a quarter of its assets in the fiscal year ended June 30, 2009.)
Gov. Edmund G. “Jerry” Brown signed legislation last year requiring higher contributions by school districts, teachers and the state to close a nearly $74 billion funding gap.
CalSTRS spokesman Ricardo Duran said the possible changes — presented at a Sept. 2 investment committee meeting — aren't connected to recent market volatility. He said investment staff has been working on a downside protection plan since the financial crisis.