CalSTRS has been chipping away at the cost of running its $288.6 billion portfolio, even as its exposure to some of the priciest investments — private markets — and the size of the plan have both climbed.
What's its secret? Officials at the California State Teachers' Retirement System, West Sacramento, say that it's all about its collaborative model, which includes managing more assets in-house, including private markets through co-investments, joint ventures and direct investments in money managers, among other strategies.
The collaborative model has saved CalSTRS an estimated average of $195 million annually over the past four years, according to its latest collaborative model savings report.
Asset owners have been clamoring for co-investments alongside their fund investments for a few years now because they can reduce the overall fees paid, boosting returns. However, not all investors have the capacity to take advantage of co-investment opportunities or gain access to them, industry insiders said.
Among the challenges: having staff with the expertise to evaluate deals as well as streamlined processes, speeding up the time it takes to make a decision on an investment.
With returns of alternative investments, which many investors see as their top performing asset classes, also getting hit by current market conditions and rising interest rates this year, reducing costs is becoming even more essential for asset owners, industry executives said.
At CalSTRS, officials found that costs declined in 2021 despite an increase in the fund's net asset value and an increase in private markets exposure over the past five years.
Its investment costs also were lower than those of its peers. In 2021, CalSTRS' investment costs for its entire plan, excluding transaction costs and carried interest, amounted to 39.8 basis points, lower than the average of 48.8 basis points per dollar for its peer group of 40 U.S. public funds and 14 global peer funds and less than the U.S. public pension plan average cost of 59.3 basis points, a CEM Benchmarking Inc. analysis shows.
And pension plan officials expect to lower investments costs even more, whittling them down to 35 basis points in the next few years, said Scott Chan, deputy chief investment officer, at the investment committee's Nov. 3 meeting.
CalSTRS total portfolio costs include management fees and internal operating costs, and are generally correlated to the pension plan's net asset value, said Shifat Hasan, CalSTRS' head of investment performance and compliance, at the same investment committee meeting.
Even so, CalSTRS' total portfolio costs decreased relative to its net asset value by 4 basis points, the first time those costs dropped in more than five years, she said, crediting its collaborative model.