The chief investment officer of the $202.1 billion California State Teachers' Retirement System, West Sacramento, says the pension plan will be examining the merits of a new engagement program that would be internally managed and make direct investments into underperforming companies with the aim of improving management and boosting the stock price.
CalSTRS, with one of the largest equity portfolios in the world, invests in 8,000 companies in its $118.3 billion stock portfolio, much of it in cap-weighted index funds.
CIO Christopher Ailman said that under the potential program, CalSTRS could make additional bets on stocks already in the indexed portfolio as part of an actively managed portfolio.
The program would be somewhat similar to the eight activist hedge funds that are part of CalSTRS' existing corporate governance program and that take concentrated positions in underperforming companies to increase the stock price.
Under the existing $3.2 billion program, fund managers attempt to force management changes and install new members on the targeted company's board of directors.
But Mr. Ailman said those activist funds also charge CalSTRS management and performance fees, costing the plan 1% to 2% on top of performance carry fees that can be as high as 20%.
“The advantage of direct investment is first off, cost,” Mr. Ailman said. “We can do it internally at much lower cost and no carry.”
With positions in multiple companies, CalSTRS' potential direct investments could be in the billions, Mr. Ailman said. CalSTRS currently manages about 50% of its portfolio in-house and the engagement investment program, if implemented, would be part of an effort to increase internal management to 60%, he said.