CalSTRS posted a net return of 9% for the fiscal year ended June 30, outperforming its benchmark return of 8.6%, said Christopher Ailman, chief investment officer, at the pension plan's investment committee meeting on July 20.
The $223.8 billion pension plan outperformed its benchmark for the three-, five- and 10-year periods, earning a 7.8% annualized return for the three years, 9.1% for five years, 6.3% for 10 years and 6.5% for the 20 years ended June 30. By comparison, the benchmark returns were 7.7% for the three years, 9.3% for the five years, 7.15% for 10 years and 6.5% for the 20 years. CalSTRS earned a 13.4% net return for fiscal year 2017.
The asset class with the highest return for the fiscal year was private equity, earning 13.8%, although it underperformed its 14.7% benchmark return. The next highest returning asset class was global equities at 11.7%, slightly underperforming its 11.8% benchmark.
Innovative strategies earned 11.4%, outperforming its 6.5% benchmark; real estate returned 10.4%, vs. its 7.1% benchmark; inflation sensitive produced 8.5%, compared to its 4.5% benchmark; risk-mitigating strategies earned a 1.8% return vs. its 1.7% benchmark; and fixed income returned 0.3%, outperforming its -0.2% benchmark.
The risk-mitigating asset class was established in 2016 to protect against equity market downturns and includes long-duration U.S. Treasuries, trend following, global macro and systematic risk premiums.
CalSTRS' actual asset allocation as of April 30, the most recent data available, was 53.7% global equities, 12.3% real estate, 12.2% fixed income, 8.9% risk-mitigating strategies, 8% private equity, 2.9% cash and 1.9% inflation-sensitive.
Mr. Ailman also discussed the 10-year business plan, which he called a "road map" for the pension plan that could approach $400 billion in assets in 10 years. The business plan expects lower returns because assets are expensive these days, but also lower costs in the future, in part, as a result on CalSTRS' becoming less reliant on external managers, he said.
The California State Teachers' Retirement System, West Sacramento, is in the midst of studying how it can use a collaborative approach to investing including making direct investments either alone or together with other asset owners in each of its asset classes. Projected lower costs is consistent with the collaborative model, Mr. Ailman said.
Staff expects to return to the investment committee in September with a recommendation regarding the collaborative model and how pension officials can implement the approach.
Among the challenges reflected in the road map is hiring talent, Mr. Ailman noted. Hiring investment executives, motivating them and retaining them as they move up the ladder is part of what Mr. Ailman said he considers CalSTRS' succession planning. The 10-year plan across asset classes includes training junior staff for relationship transfer and succession planning.
Still, Mr. Ailman noted that "it is more and more a challenge to recruit."
In private equity, for example, CalSTRS has been looking to hire investment professionals with more transaction experience, said Margot Wirth, director of private equity, at the July 20 investment committee meeting. The private equity team has been "drifting toward" hiring more deal-focused professionals but that should accelerate as CalSTRS moves toward the collaborative model, she said.
Currently, 93% of CalSTRS' $18.2 billion private equity portfolio as of March 31 was invested with external managers, with the remaining 7% internally managed, Ms. Wirth said.
She said that it would "not be overly ambitious" to expect that 20% of the portfolio could be internally managed in co-investments in three years.
As part of its fiscal year 2019 business plan, CalSTRS' private equity team expects to work to establish joint ventures with other like-minded and complementary investors as well as to consider investing in money managers "when strategic for the program."