CalSTRS preps risk-mitigation portfolio
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Varagon Capital fills new business development role
      Fitch Group in deal to acquire CreditSights
      Credit managers’ outlook still gloomy but brightening – survey
      Digital Colony picks head of Europe capital formation
    • Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
      Marsh & McLennan Agency sets sights on Compass Financial
    • New York State Common challenges Tyson’s dual-share stock structure
      Credit managers’ outlook still gloomy but brightening – survey
      Investors call for action on COVID-19-induced humanitarian crisis at sea
      U.S. jobs worker restaurant
      Job market slipped in December as virus surge hindered activity
    • Ascensus, Empower acquire Truist record-keeping business
      PCS Retirement acquires Alliance Benefit Group-Rocky Mountain
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • New law requires MassPRIM to increase diversity of managers, consultants
      Impact investors getting savvier, more efficient – report
      SSGA alum named head of ESG at Mirova
      Aegon moves to cut carbon from workplace DC business
    • Galina Churkina
      Building research earns honor from Aquila Capital
      Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      MacArthur Foundation invests in women’s safe housing fund
      Bill Harmon
      Voya offers fee break for minority-owned firms
    • The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
      Michael Hintz
      CQS deal with spinoff team falls apart
    • New York State Common challenges Tyson’s dual-share stock structure
      A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      Maine Public Employees boosts target to alternative credit
    • A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      A sign at a China Telecom Corp. store in Shanghai on Jan. 6, 2021
      Managers make further divestments from sanctioned Chinese firms
      The Chinese flag flies in front of the Liaison Office of the Central People's Government in Hong Kong on May 22, 2020
      Standard Life Aberdeen JV to open mainland China pension insurance company
    • Maine Public Employees boosts target to alternative credit
      Los Angeles City Deferred Comp narrows list to 2 in manager search
      Connecticut pension fund CIO resigns
      Arizona State Retirement looking for CIO
    • Sharmila Chatterjee Kassam
      AIF Institute hires former Texas ERS deputy CIO as executive director
      Varagon Capital fills new business development role
      SSGA alum named head of ESG at Mirova
      Capital Group hires BlackRock executive to launch ETF unit
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
      CPPIB in deal with Greystar to develop U.S. housing
      Global real estate investments to hit $79 billion in 2021 – survey
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      David Ireland
      Sponsors returning to questions about in-plan annuities
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
      Hedge funds warming up to financial sector, remain long U.S. equities
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • Climate change and emerging markets after Covid-19
      An Asset Owner's Guide to Multi-Manager Portfolio Management
      Research for Institutional Money Management
      The Future of the U.S. Dollar - Dominant currency or one of many?
    • Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
      Robert Raben
      Commentary: What the asset management industry must do to bolster diversity
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By iShares
      For institutional investors, ETFs can make meeting liquidity needs easier
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
      By the Numbers
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
April 18, 2016 01:00 AM

CalSTRS preps risk-mitigation portfolio

Fund hopes to reduce impact of future economic downturns

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Chris Goodney/Bloomberg
    Christopher J. Ailman hopes to avoid drastic losses, but could give up some gains, too.

    CalSTRS will move a $16 billion portion of its investment portfolio into a new risk mitigating strategies portfolio and is interviewing 25 managers in coming months to select which firms will manage it.

    The move by the $178.7 billion California State Teachers' Retirement System is part of what is expected to be a three-year transition to reduce the impact of another economic downturn by shifting money away from some equity and fixed-income holdings. Instead, CalSTRS will move 9% of its portfolio into hedge funds, other complex hedge-fund-like investments and long-duration U.S. Treasuries.

    The trade-off for restructuring the overall portfolio should be downside protection — lessening portfolio losses in years the equity markets are down — but also giving up top-tier performance in years when markets are way up, said Christopher J. Ailman, chief investment officer of the West Sacramento-based pension fund, in an interview.

    “It's the recognition that if you want to reduce the drawdown in your negative years you are not going to be able to receive the top-side extreme maximums”, Mr. Ailman said. “What we're trying to do with RMS (the risk mitigating strategies portfolio) is dampen the entire volatility. What happens is, when you lose less money in negative markets, and the market begins to rebound, you're rebounding with a bigger pool of capital.”

    Massive losses

    CalSTRS, like many of its public pension fund counterparts throughout the U.S., saw massive losses in 2008 and 2009. CalSTRS itself saw its assets decline by around a quarter in the fiscal year ended June 30, 2009.

    The retirement system's funding level is 68.5%. CalSTRS was scheduled to run out of money to pay retirees by the mid-2040s before the state Legislature and the governor agreed to a package in 2014 that increased contributions from school districts, the state and teachers.

    But that plan to reach full funding is dependent on CalSTRS meeting its annual expected rate of return of 7.5%, a goal that pension fund officials say can still be met but with less volatility under the RMS approach.

    Critics have said a 5% expected rate of return is more realistic long term.

    The pension fund earned a 4.8% return for the fiscal year ended June 30, but had an annualized 7.8% for the 20-year period ended June 30.

    CalSTRS said in a November report that it back-tested its RMS strategy looking at the 20 worst months for the S&P 500 in the past 21 years. It said the average S&P return during those months was -8.6% while the RMS portfolio generated an average positive return of 2.98%

    Under the RMS plan, the retirement system will reduce equities to 47% from 51% of the total portfolio and fixed income, to 15% from 17%. The $16 billion risk mitigating strategies portfolio would consist of 35% long-duration U.S. Treasuries, 40% trend-following strategies, 15% global macro hedge funds and 10% systematic risk-premium strategies.

    Mr. Ailman said CalSTRS will be placing its money in separate or managed accounts as part of a plan to get substantial fee reductions.

    CalSTRS certainly isn't the only pension system looking to reduce the impact of another downturn using various volatility management strategies.

    A report by Lyxor Asset Management, CalSTRS' hedge fund consultant, found that around the world, large public pension funds were very active in global macro and trend-following investments in 2015.

    The report found that last year:

    nin Sweden, the $35.8 billion AP3, Stockholm, allocated $1 billion to global macro strategies for the first time;

    nKorea Post Savings, Seoul, with $60 billion in assets, has been looking for global macro and market-neutral strategies and issued two RFPs, with a target allocation of $1 billion;

    nthe $42.3 billion Teachers' Retirement System of the State of Illinois, Springfield, invested $588 million in global macro and managed futures strategies;

    nthe $8.7 billion School Employees Retirement System of Ohio, Columbus, hired William Blair & Co. to run a $50 million global macro strategy and the $9 billion Municipal Employees' Retirement System of Michigan, Lansing, invested $300 million to run a similar allocation; and

    nthe $27.7 billion Iowa Public Employees' Retirement System, Des Moines, issued an RFP in August to select a managed account platform provider to build an allocation to trend-following and global macro funds.

    Bundling as insurance

    What makes the CalSTRS' approach different is that it is bundling four different approaches in its RMS portfolio, each of which would act as an insurance policy for the others, ione of the strategies doesn't work, Mr. Ailman said.

    Two smaller pension funds are using a bundled approach, and committing even more to it than CalSTRS plans to allocate. The $14 billion Employees' Retirement System of the State of Hawaii, Honolulu, and the $2.6 billion San Joaquin County Employees' Retirement System, Stockton, Calif., each are moving 20% of their total assets into new crisis risk offset strategic portfolios.

    The three pension funds have the same general consultant, Pension Consulting Alliance, Portland, Ore., which has been pushing the bundled risk mitigation approach.

    PCA Managing Director Neil Rue said bundling alternative strategies as part of a risk-offset strategy offers a dynamic approach, but one that plan executives have to manage proactively.

    “All the individual components can be quite volatile,” Mr. Rue said. “It's not like buying an index fund and putting it on autopilot.”

    Vijoy Chattergy, CIO for the Hawaii Employees' Retirement System, said the pension fund plans to move 10% of total assets into the new portfolio by the end of 2016 and 20% by 2020.

    Mr. Chattergy said the aim is to reduce equity exposure from around 64% of the portfolio to 45%, investing the money instead in long-duration bonds, systematic trend followers and systematic alternative risk premiums that can help reduce the impact of an equity downturn.

    “We do believe the world periodically experiences financial crises,” Mr. Chattergy said.

    The San Joaquin County Employees' Retirement System approved a 20% allocation to its crisis offset risk portfolio in October, composed of long-duration Treasuries; systematic trend-following and alternative risk-premium strategies, documents on its website show.

    The purpose of this new (crisis risk offset) class is to provide significant return during a growth crisis using liquid instruments available at scale for reasonable cost,” said plan CEO Annette St. Urbain.

    Not without risk

    But CalSTRS' $16 billion move dwarfs other pension funds.

    Mr. Ailman also sees the RMS portfolio becoming bigger over time if it proves successful in reducing volatility in lean years. He said the portfolio could be increased to 12% of CalSTRS' total assets once the initial three-year period is over.

    The new strategy comes with some risk. A February report from the pension fund's investment staff noted that trend followers generally benefit as markets become severely stressed following a financial crisis, but the strategy will suffer if a mild market correction does not extend and markets quickly reverse course.

    Systematic risk-premium strategies should add uncorrelated value when markets are stable and after mild market corrections, the report said.

    But it noted that while the thesis is supported by academic research, live strategies have been developed only recently and have no long-term track records.

    The biggest risk might be staying with the strategy in good equity markets. The report said that based on capital markets assumptions, U.S. equities are expected to outperform risk-mitigating strategies over a five-year period by about 2.8 percentage points annually on average and by 9 percentage points or more about 25% of the time over the next two decades.

    CalSTRS isn't entirely new to the approach; it has been test-driving a combined $1.8 billion portfolio composed of global macro funds since late 2011 and trend-following strategies since 2014.

    CalSTRS data show that its portfolio of global macro funds and trend following had a 5.4% rate of return between Jan. 1, 2014, and Feb. 29, 2016, a period when the S&P 500 was down 3%.

    Mr. Ailman said existing managers will get larger amounts of money as part of the RMS allocation before the retirement system hires new managers. But the current managers will need to give the pension fund lower fees, he said.

    “We are putting on the boxing gloves, we're going to renegotiate some of those fees,” he said. n

    Related Articles
    Investors not following New York City's lead
    CalSTRS to hike percentage of assets managed internally
    Crisis alpha everywhere
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Climate change and emerging markets after Covid-19
    An Asset Owner's Guide to Multi-Manager Portfolio Management
    Research for Institutional Money Management
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    The Future of the U.S. Dollar - Dominant currency or one of many?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center