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Pension Funds

CalSTRS panel lays out options for pension fund to expand alts capabilities

Investing in alternative investments "is not a fair game," Ashby Monk, executive and research director at Stanford University's Global Projects Center, told the CalSTRS' investment committee on Wednesday during a panel discussion on ways to expand co-investment and direct investment in alternative investments.

Mr. Monk led a panel discussion on ways the $225.3 billion California State Teachers' Retirement System, West Sacramento, uses various models for making co-investments and direct investments. Currently, CalSTRS does not manage alternative investments internally. It co-invests in real estate, infrastructure and private equity. It owns stakes in real estate firms only. The pension fund had 11.8% invested in real estate, 7.7% in private equity and 1.6% in inflation-sensitive assets, which includes infrastructure, as of Dec. 31.

In May or June, CalSTRS' staff plans to present options for pursuing a larger commitment to direct investing.

The academic literature show that the interests of limited partners and general partners in alternative investment are misaligned, Mr. Monk told the committee. Institutional investors are "gamed on fees" and the longer an investor's relationship with its alternative investment money manager, the more fees the asset owner pays, he said.

The members of the panel were Mark Wiseman, a senior vice president at BlackRock (BLK) and chairman of BlackRock Alternative Investors, and Jonathan Hausman, managing director and head of global strategic relationships at the C$180.5 billion ($145.2 billion) Ontario Teachers' Pension Plan, Toronto.

Drawing heavily from his experience as president and CEO of the C$328.2 billion Canada Pension Plan Investment Plan board, Toronto, which he left in 2016, Mr. Wiseman said that the CPPIB built up capabilities in-house by identifying the competitive advantages it had, including scale and a long-time horizon, to earn the risk-adjusted returns it wanted from alternative investments at sometimes half the cost of investing in funds.

One of the capabilities CPPIB had was the ability to hire staff at private market-type salaries "and not civil servants so we could attract and retain different people," he said. As of 18 months ago, CPPIB investment staffers earned an average of $1 million a year.

Mr. Hausman noted that there is more competition for private equity deals today. Currently, Ontario Teachers is changing from its traditional silo organization to a more resilient organization, which has the ability to adjust and make modifications quickly.

Separately, CalSTRS adopted a complete set of investment beliefs to help guide investment decisions across its portfolio, after adopting on Wednesday the eighth and final investment belief on alignment of interests.

The crux of the debate that lasted nearly two years was whether alignment of interests rose to the level of a full investment belief.

"CalSTRS is best served when there is contractual alignment of financial interests with its external investment advisers and managers and transparency about those interests," the newly adopted investment belief states.

The other seven beliefs, adopted in the 2017 fiscal year, are on diversification, global markets, minimizing costs, internal management, capturing illiquidity, short-term downside risk, and environmental, social and governance issues. CalSTRS' investment beliefs will be posted on its website and included as part of its investment policy and management plan packet to the public.

Also, during the meeting Chief Investment Officer Christopher Ailman reported that at its March offsite meeting staff plans to ask the investment committee to approve one-year contract extensions for its private equity and general investment consultant Meketa Investment Group and general investment consultant Pension Consulting Alliance. CalSTRS officials expect to launch RFPs for consultants in 2019.