CalSTRS adopted a new global equity investment policy to include the use of an active risk budget.
The investment committee of the $252.4 billion California State Teachers' Retirement System, West Sacramento, adopted the active risk budget to allow staff to move equity investments between passive and active management. CalSTRS had $128.5 billion in global equities as of Dec. 31.
The new global equity investment policy replaces the pension plan's active-passive allocation targets and ranges with a permissible range of active risk for the total global equity composite. The policy-defined active risk budget is now the key guardrail for managing risk by keeping the global equity composite within an approved range to its benchmark. CalSTRS former approach was to use fixed-target allocations to actively managed composites by region.
The active risk budget gives staff more flexibility to invest in the "best opportunities across global markets, regardless of the region," a report to the investment committee said.
CalSTRS' global equity portfolio is now managed within an annualized forecast active risk range of 10 to 50 basis points, according to the policy. Formerly, 30% of CalSTRS' U.S. equity portfolio was to be actively managed, 50% of non-U.S. developed was to be actively managed and 100% of the emerging markets equity portfolio was to be actively managed.
Separately, CalSTRS revised its investment policy for its $7 billion inflation-sensitive portfolio. Among the changes, pension plan officials replaced its allocation ranges of 20% to 80% for both public and private inflation sensitive assets with ranges for each category. The range for U.S Treasury inflation-protected securities is zero to 40%, commodities is zero to 30% and private inflation sensitive assets is 40% to 100%.
CalSTRS also revised its infrastructure allocation range by 5 percentage points to 40% to 70% from 45% to 75%, and increased opportunistic by 5 percentage points to 5% to 25% from zero to 20%. The policy also increases the upper end of the infrastructure portfolio's allocation range to the U.S. and Canada to 75% from 70%. The lower end of the range remains 30%.CalSTRS has $4.1 billion in infrastructure, which is part of the inflation-sensitive portfolio with a separate investment policy.
The investment policy also increases the investment limit for a single money manager to 20% from 15% of CalSTRS' infrastructure portfolio.
"This fits in well with the collaborative model in terms of working with high conviction managers," a staff report to the investment committee states. "It also allows CalSTRS to continue to grow the portfolio with fewer managers, thus keeping fees low and being seen by our managers as good and steady sources of capital."
The policy also increases the amount staff has discretion to invest without board approval to $500 million from $300 million for separate accounts and commingled funds.
Additionally, CalSTRS revised the investment policy for its $1.05 billion innovation portfolio to add two new strategies to the portfolio. One new sector is called the strategic portfolio and includes generally long-term investment categories that do not fit in any of CalSTRS' existing asset classes. Investments in the long-term investment category could remain in the innovative strategies portfolio or graduate to an existing asset class or part of a new asset class. One example is the private credit strategy that is currently part of CalSTRS incubation portfolio.
The second new category is an opportunistic portfolio, which allows staff to invest in strategies that are generally short-term strategies seeking to capitalize on tactical opportunities, mispricing or distress in the capital markets.