CalSTRS adds 5% allocation to private credit

CalSTRS approved a revised fixed-income policy that adds a 5% target allocation to private credit as part of its 13% fixed-income allocation.

The $310.9 billion California State Teachers' Retirement System, West Sacramento, had $32.2 billion in fixed income as of June 30. CalSTRS is adding up to 5% in private credit because it has gained "a foothold in many institutional investors' portfolios" because it generates cash flow with a higher risk-adjusted return than public debt, according to a staff memo for CalSTRS' Sept. 1 meeting. Private credit also reduces the correlation of fixed income to public equity and public debt.

CalSTRS also added risk budgets for its fixed income and its sustainable investment and stewardship strategies portfolios. The additions are part of a CalSTRS plan to include risk budgets in all of its public market strategies: equities, fixed income, and sustainable investment and stewardship strategies. CalSTRS already adopted a risk budget for its global equity portfolio in March 2020.

Risk budgets allow staff flexibility to invest among asset categories within public market asset classes, said CIO Christopher Ailman at an investment committee meeting.

The new fixed-income risk budget is between 10 basis points and 60 basis points for the publicly traded fixed-income assets. The active risk budget for the sustainable investment and stewardship portfolio is between 50 basis points to 250 basis points relative to a custom MSCI ACWI IMI index.

At the same time, the investment committee directed CalSTRS' general investment committee to review the benchmarks for the entire plan in light of the addition of active risk budgets for its public market asset classes and report back to the committee in early 2022.

Separately, CalSTRS pledged to achieve net-zero greenhouse gas emissions across its investment portfolio by 2050 or sooner to align its portfolio to the Paris Agreement targets. The investment committee also adopted a four-part implementation plan to move the portfolio to net-zero by 2050 or sooner. The first part is the pledge that CalSTRS adopted. Next, CalSTRS will adopt a net-zero action plan that will expand its investments in low-carbon solutions that benefit from the transition to net-zero and meet CalSTRS' risk-return objectives. CalSTRS will also adopt a set of actions for the next year starting in January.