CalSTRS ahead of schedule on funding new risk mitigation portfolio

CalSTRS' chief investment officer said the pension plan will be close to fully funding the target allocation of its new $20 billion risk mitigation asset class by December — six months ahead of schedule.

The new asset class, which the $213.5 billion pension plan began building in 2016, aims to lessen investment losses during periods of equity market downturns and reduce portfolio volatility, but returns could also trail peers in bull markets.

CIO Christopher Ailman said in an interview the West Sacramento-based pension plan had originally expected the target allocation for the new asset class would be reached by June 2018, but investing is occurring at a faster pace than initially anticipated.

The new portfolio is pegged at 9% of CalSTRS' total portfolio, so the actual amount of the portfolio will be a moving target, depending on the total asset size.

CalSTRS had $10.7 billion invested in the asset class as of June 30, Mr. Ailman said.

The asset class consists of four components: 45% to trend-following strategies, 40% to long-dated Treasuries, 10% to global macro and 5% to risk premium strategies. An August report that includes data through June 30 shows that CalSTRS had $4.9 billion invested in trend-following strategies, $4.1 billion in long-dated Treasuries and $1.5 billion in global macro strategies. The pension plan had not made any investments in risk premium strategies as of June 30.

The report says four new trend-following managers were hired to offer "better diversification" for those strategies, but does not list the managers. CalSTRS officials did not provide the names of the firms by press time.

"We have been shaving profits out of the U.S. equity market during this rally and using that to help to help fund our defensive strategies," Mr. Ailman said.

CalSTRS expects to have reduced it public equity asset class to 47% from 51% and fixed income to 15% from 17% as part of the buildup of the risk mitigation portfolio.

Mr. Ailman's update on the risk mitigation portfolio comes as the California State Teachers' Retirement System is scheduled to hold its annual retreat meeting Tuesday and Wednesday in San Diego.