Infrastructure investing is "an evolution, not a revolution" for the West Sacramento-based California State Teachers' Retirement System, said Paul Shantic, director of inflation sensitive portfolios at the $233 billion pension plan.
Speaking Friday at an EDHECInfra event in London, Mr. Shantic said CalSTRS, in efforts to diversify its overall portfolio, has been investing in infrastructure via its $5.6 billion inflation sensitive portfolio, which is comprised 64% of infrastructure investments.
Talking about the fund's overall portfolio, he said: "Right now our goal is about 4%. We are in the middle of an asset allocation (study). From what I understand, the (asset allocation) model loves to grab infrastructure. So I'm excited to see where that goes over the next year."
"We (are) probably going to see an increase along the way," he said.
Looking for cash-yield and modest capital appreciation, CalSTRS will likely remain in the 65% to 70% range, Mr. Shantic said.
"Double-digit return is not what infrastructure should do in a portfolio, Mr. Shantic said.
"We want to hold it for a long time," he said. "My CIO likes ugly, dirty infrastructure." One example is cables buried in the New York subway system, Mr. Shantic added.
"It's not P3 airports, which certainly is sexy," he said, referring to public-private partnership infrastructure projects.
But Mr. Shantic noted CalSTRS faces many of the same problems other investors do, including a shortage of infrastructure research, lack of benchmarks, and environmental and social and governance issues associated with infrastructure investing.
"We all know (CPI plus 3%) is not a good benchmark but consultants come to us and say you should do this, it makes sense" he said.
But: "We want to preserve our capital."
"If things go wrong, because they do go wrong, I want to know what your downside protection will be."
To address these issues, CalSTRS is planning on bringing more staff into the infrastructure, private equity and real estate side to be able to take on more risk or do analysis internally, Mr. Shantic said.
"We are not trying to replace managers but we are looking for a better deal," he added.
Mr. Shantic said it has been challenging to develop staff internally but CalSTRS is going to need experts with different skill sets.
"The difficulty is to find people that can look at an asset with the manager and then come to a common understanding what the asset prices should be," he said.
According to Mr. Shantic, CalSTRS has plans to examine how to make its internal structure more flexible to accommodate real assets investing over the next six months to get to a "different playing field."
But, he said, "we (are) not going to be the Canadians or Australians," whose retirement plans have set up specific units to source infrastructure deals.
CalSTRS will continue to concentrate on co-investments and some segregated accounts to "control our destiny a bit more."
In discussing environmental and social aspects of infrastructure investing, Mr. Shantic said CalSTRS has similar ESG and sustainable issues as other asset owners.
ESG to Mr. Shantic involves due diligence on assets but, he said, that is evolving. There is still a disagreement as to what is considered social or what is considered governance, he said.
"So that's a major part of what our thinking is and how to get" to standard definitions of ESG in infrastructure.