CalSTRS has adopted a new long-term asset allocation that increases its inflation-sensitive, real estate and risk-mitigating strategies at the expense of public equities in a move to diversify its portfolio and improve its risk-return trade-off.
After a nearly yearlong asset-liability study, CalSTRS' investment committee voted unanimously Nov. 6 to adopt the new allocations, despite a somewhat chaotic start to the meeting triggered by a spontaneous climate change protest aimed at persuading CalSTRS to divest from fossil fuels in its equity portfolio.
The demonstration led the committee to take up its closed-session agenda at the start of the meeting, rather than at the end. The open meeting continued after CalSTRS officials and the activists that included members of Fossil Free California agreed to first allow the investment committee to decide whether to adopt the new asset allocation uninterrupted, followed by a public comment period.
The $242.1 billion West Sacramento-based California State Teachers' Retirement System increased its real estate and inflation-sensitive assets' long-term targets by 2 percentage points each to 15% and 6%; and risk-mitigating strategies by 1 percentage point to 10%.
At the same time, CalSTRS reduced its long-term public equity allocation by 5 percentage points to 42%.
Rounding out the new asset allocation, CalSTRS retained its 13% private equity, 12% fixed income and 2% cash liquidity allocations.
The new long-term asset allocation is designed to shift the portfolio allocation to real assets for diversification benefits and more stable income from the economic growth risk of public equity, according to a report to the committee. Even though real assets returns are expected to be a bit lower than pub- lic equity, CalSTRS executives said they expect the relatively more stable income-driven returns will dampen portfolio risk.
Indeed, CalSTRS' largest source of risk and return is from economic growth, which comes from its allocations to public equity and private equity.
Currently, approximately 67% of the total risk in CalSTRS' portfolio is from public equity, compared to about 49% in public equity assets in the portfolio, according to Chief Investment Officer Christopher Ailman's report.
Equity risk has risen modestly since reaching a bottom in July, Mr. Ailman' report said. Public equity risk and private equity risk combined now comprise approximately 81% of portfolio risk.