CalSTRS rejiggers asset allocation to mirror long-term targets

CalSTRS' investment committee decided move its asset allocation closer to its long-term asset allocation targets adopted in 2015, during its meeting Thursday.

CalSTRS will increase its target allocation to inflation-sensitive assets, private equity and real estate by 1 percentage point each to 3%, 9% and 13%, respectively. CalSTRS will cut its global equity allocation by 3 percentage points to 51%.

The rest of the target allocations for the $226.5 billion California State Teachers' Retirement System, West Sacramento, will remain the same: 13% fixed income, 9% risk-mitigating strategies, 2% cash liquidity and zero to innovative strategies.

CalSTRS' CIO Christopher Ailman explained that the investment policy and management plan plots a course toward the strategic asset allocation the board adopted in 2015.

"We plot a rough course and we know it will change," Mr. Ailman told the investment committee. "We don't do it by the calendar because investments don't follow a calendar ... We want to do it by opportunity."

He noted that the asset allocation changes adopted by the board are small because the targets will move up or down when the board adopts new long-term asset allocation in November.

In other action, the investment committee delayed a decision on whether to adopt a risk budget so that investment committee could continue studying and learning about the topic, investment committee Chairman Harry M. Kelley said at the meeting, summarizing statements made by board members during their discussion. A risk budget is a new strategy for CalSTRS that would set a limit of risk staff should take in implementing the strategic asset allocation set by the board.

During the meeting, Allan Emkin, managing principal of Meketa Investment Group, CalSTRS' general investment consultant, said that creating a risk budget is a "best practice" that is being adopted by boards of other asset owners that have the resources to implement them. Implementation of a risk budget takes one to two years, a staff report to the investment committee estimated.

If the board continues with static allocation targets, the board runs the risk of outperforming the pension fund's benchmarks.

"By adopting a risk budget, you delegate responsibility to the staff ... I believe it is a legitimate delegation," Mr. Emkin said. "You are making that decision now and you don't realize you are making that decision."

Investment committee members would like to know what a risk budget would mean for each of the asset classes, as well as the risks and shortcomings of adopting a risk budget.

"What do the naysayers say?" Mr. Kelley asked.

Separately, Mr. Kelley suggested that when the investment committee considers its next two-year work plan in May that it include the impact of a transition to a low carbon economy will mean to each asset class.

Mr. Kelley made the suggestion after the investment committee had discussed this year's Green Initiative Task Force report. The task force was set up in 2007 to address global environmental issues and to identify, analyze and propose potential investment and risk control strategies related to climate change.

Among the initiatives for fiscal year 2019, CalSTRS officials will execute the second phase of the CalSTRS' $2.5 billion Low-Carbon index, a low carbon public equities index, the report noted. This phase will include an additional $1.2 billion investment in non-U.S. developed markets and emerging markets, with $200 million invested in emerging markets, the report said.

In the initial implementation of the CalSTRS Low-Carbon index on July 1, 2017, pension officials made a $1.3 billion investment in the U.S. market.

The Low-Carbon index is managed internally and returned 14.79% in its first year of performance, during fiscal year 2018, outperforming its benchmark by 4 basis points.