As the two plans mull how work will get done, CalPERS and CalSTRS are considering possible investment changes this year.
CalPERS is about to launch its asset-liability cycle in which the board will consider increasing private equity and private debt and including leverage as part of its strategic asset allocation so that it can hold more alternative investments in its portfolio. CalPERS had $27 billion in private equity, $43.1 billion in real assets, $500 million in an opportunistic portfolio and $7.1 billion in a trust level portfolio that includes multiasset class, completion overlay and absolute-return strategies (direct investments only).
The investment committee is expected to review capital market assumptions in June and sample portfolios in September. Selection of a new strategic asset allocation is slated for November, said Dan Bienvenue, interim CIO, at the Jan. 21 stakeholder forum, the first conducted virtually.
Meanwhile, CalSTRS' board starting at its Jan. 28 investment committee meeting is expected to entertain adjustments to the asset allocation plan it adopted in November 2019 due to the Federal Reserve outlook, announced in August, for interest rates to stay "lower for longer," leading to lower expected investment returns than anticipated when the asset allocation was adopted, according to the CIO report for the investment committee meeting. The Federal Reserve's forecast has led Meketa Investment Group, CalSTRS' general investment consultant, to change its capital market assumptions and suggest a number of new ideas to the investment committee, Mr. Ailman said.
"The board may zero in on a couple of those ideas … Right now it's all just talk," he said.
One of the proposals is to create an opportunistic portfolio, Mr. Ailman said.
Meketa has not fleshed out the details but Mr. Ailman stressed that it would not involve opportunistic trading.
"We're not short-term investors," he said. "We would have to invest a large amount of money for that to be worthwhile at our size. It would need to be a long-term opportunity."
CalSTRS will continue to implement its collaborative model, which includes investment strategies to reduce costs, boost returns and possibly provide revenue such as managing more assets in-house, co-investing and, in real estate, acquiring minority or majority interests in money managers. CalSTRS officials will also provide board education on the pros and cons of investing in China. Mr. Ailman said that he wants to position CalSTRS as the leading pension fund in sustainability and climate change.
"Over time, you are going to see more and more investment along the themes of sustainability and climate change," he said.
CalSTRS board is expected to consider a policy for a new private equity sustainability portfolio, with the first draft of the policy to be reviewed at the investment committee's next meeting.
The environmental issue is "right before us. It's dramatic. It's a risk we can help mitigate, and an opportunity," Mr. Ailman said.
While Mr. Ailman said that when the pandemic led to sharp market drop, followed by an equity market rally in the summer, CalSTRS officials let the equity portfolio increase toward its plus or minus 6% allocation range.
"We almost never let it get that wide. We were still fairly conservative, shaving profits and reinvesting them or continuing to hold our cash," he said. "We are still fairly neutral to the asset allocation but we widened the bands and let the equity marks run a bit."
It was not just domestic equities. Aside from emerging markets, non-U.S. equities were just as strong as the U.S. market, he said. Periodically, CalSTRS' officials pared back the equity overweight.
Meanwhile, CalSTRS' $20.6 billion risk-mitigating strategies portfolio, developed after the 2008 global financial crisis to protect the portfolio in down markets, "has done exactly what we wanted," even though the market downturn was historic in its speed, he said.
"It was designed for a traditional bear market that takes its time," Mr. Ailman said. Even so, while the risk-mitigation portfolio struggled, it still achieved its goal of dampening down the downside, he said.
A sizable portion of the risk-mitigation strategies portfolio is in 30-year government bonds, which rallied during the market volatility, Mr. Ailman said. Some of the other strategies couldn't react as quickly, he said.
"It was an hour-by-hour, minute-by-minute reaction. It (the RMS portfolio) wasn't exactly designed for that kind of crisis. We've never seen one like that before."