CalSTRS will launch an asset-liability study at the investment committee meeting Wednesday, with that panel expecting to adopt a new asset allocation as early as November and an implementation plan by February 2020, according to agenda materials for the $214.9 billion pension fund.
The West Sacramento-based California State Teachers' Retirement System's current target allocations are 54% global equity, 13% fixed income, 12% real estate, 9% risk-mitigating strategies, 8% private equity, 2% inflation-sensitive assets, 2% cash and liquidity assets, and zero innovative strategies.
Since the early 2000s, CalSTRS' strategic asset allocation trends have included lowered allocations to public equity and fixed income, increased allocations to private equity and real estate, and the pension fund has also created two new asset classes: inflation-sensitive assets and risk-mitigating strategies.
Officials are also considering how to implement collaborative models for the private equity and inflation-sensitive asset classes. According to staff reports for the meeting Wednesday, implementation would require additional staff as pension fund officials increasingly focus on co-investments in private equity, and co-investments and separately managed accounts for inflation-sensitive assets.
CalSTRS' private equity officials expect to significantly increase co-investment activity over the medium term of two to five years. The private equity team expects their co-investments will grow larger and gradually be more complex.
Since 1996, CalSTRS co-investments have been somewhat sporadic, with more than 90 transactions achieving a return of 1.5 times invested capital: $3.4 billion co-investment contributions, $3.4 billion distributions and $1.5 billion in current remaining value.
Over the past four years, the pension fund's co-investment commitment level has increased, with CalSTRS investing a total of $1.1 billion in 22 private equity co-investments. In the last two calendar years, 8% to 9% of the roughly $6 billion to $7 billion in total private equity commitments have been in co-investments.
Private equity staff is recommending an increase in staff size of about 15 professionals: 10 investment selection specialists, bringing the total to 28; and five operations specialists, for a total of 10.
What's more, CalSTRS' private equity staff believes the co-investment executives should be paid "a higher average salary" vis-a-vis private equity professionals, the private equity staff's report said. The report also mentions that the private direct and co-investment program would benefit from being located in a major financial center such as the San Francisco Bay Area.
CalSTRS' private equity co-investments earned a 27.3% internal rate of return in the year ended March 31, and an annualized 13.7% for the five years and 6.6% for the 10 years ended the same date. By comparison, its private equity funds have produced a return of 14.2% for the one-year period, and an annualized 12% for the five years and 8.1% for the 10 years, all ended March 31.
The collaborative model implementation plan for CalSTRS' inflation-sensitive assets, which includes infrastructure, commodities, timber and agriculture, would increase core infrastructure, increase co-investments, possibly pursue secondary investments, expand the pension fund's commodities allocation and selectively increase agriculture and timber investments.
The inflation-sensitive team said in its report that it expects it would need to add six to 12 positions over the next five years.