CalSTRS' collaborative model that brings more assets in-house has saved the $307.9 billion pension fund a total of about $1.6 billion over five years, but the savings are starting to level off, according to a staff report.
Between 2017 and 2022, the collaborative model saved the California State Teachers' Retirement System, West Sacramento, an average of $273.5 million, the report said. This is an increase from an average annual savings of $243.6 million between 2017 and 2021.
The savings were generated from such investments as internally managed equities and fixed income; joint ventures, separate accounts and managed accounts, which often have reduced fee and carried interest expenses; and co-investments that mainly have zero management fees and carried interest. However, the savings from the collaborative model is beginning to plateau, and CalSTRS officials expect savings to continue slowing as the deal flow has decreased with fewer private asset transactions, the report said.
CalSTRS may look at ways to generate added savings including managing more public markets assets in-house. Currently, about 75% of CalSTRS public equity portfolio is internally managed, and CalSTRS officials are looking to do more, especially actively managed assets, said Christopher Ailman, CalSTRS chief investment officer, at the investment committee's Nov. 1 meeting.
The fund wants to increase the share of its private equity portfolio that is in co-investment and other lower fee strategies to 35% from 20%. Co-investments was the source of the largest amount of savings from the collaborative model, with co-investments across the private asset classes cutting $246.3 million in costs in 2022. CalSTRS saved $88.2 million in 2022 by internally managing public market assets.
"The low hanging fruit in the collaborative model has been picked," said Stephen McCourt, managing principal and co-chief executive officer at CalSTRS general investment consultant Meketa Investment Group, at the same meeting.
"The ability to extract additional savings from the collaborative model gets harder and harder," which is a natural part of the cost savings curve, he said.
What's more, carried interest is a contingent cost that limited partners bare when the private markets produce value, McCourt said. CalSTRS will save the most on carried interest when returns are down, he added.
CalSTRS had 39.3% invested in public equity and 15.8% in private equity as of Aug. 31.