CalSTRS' investment committee on Thursday took another step toward implementing the long-term asset allocation adopted in January 2020, increasing the private equity target by 2 percentage points to 13% and attaining the asset class' long-term allocation, while cutting the global equities target by 2 percentage points to 45%.
When the $327.7 billion California State Teachers' Retirement System, West Sacramento, adopted its long-term target allocation two years ago, officials planned to shift to the new allocation gradually, adopting a series of interim target allocations over time as it moved toward the long-term target allocations for each asset class.
However, private equity grew faster than staff expected due to "opportunities available over the last year," a staff memo said. As of Dec. 31, CalSTRS had $45 billion, amounting to 13.7% of plan assets, invested in private equity.
Christopher J. Ailman, CalSTRS CIO, said at Thursday's meeting that while the actual private equity allocation "has overshot for now," a lot depends on how much the total pension fund assets increase or decrease.
What's more all of the target allocations have a range of plus or minus 3 percentage points, Mr. Ailman said.
Target allocations for the rest of the asset classes will remain at current levels: real estate at 14%, a percentage point below its long-term target; fixed income at its long-term target of 12%; risk mitigating strategies at its 10% long-term target allocation, inflation sensitive at 4%, 2 percentage points below its long-term target; and cash/liquidity at its long-term target of 2%.
"With the COVID-19 global pandemic, we have seen significant volatility on the global financial markets and rise in market valuations across the portfolio" with real estate, inflation-sensitive and private equity growing to a larger percentage of the asset mix, the staff memo said.
The revised asset allocation became effective on Jan. 1. CalSTRS plans to review its asset class and economic assumptions in 2023 in preparation for the formal start of its next asset-liability review in 2023.
In other action, CalSTRS modified its private equity policy to increase delegation of investment authority to staff and ease some limits for potential co-investments.
The delegation of authority to staff to make private equity investments is now expressed in terms of percentage of the net asset value of CalSTRS' private equity portfolio rather than in dollars. Commitments to limited partnerships with existing managers is now 4% of private equity net asset value, which would currently amount to $1.75 billion, up from $750 million. Co-investments and direct investment in GP management companies are 2% of net asset value, which would currently amount to $880 million, from $250 million.
The private equity policy now allows co-investments alongside general partners with whom CalSTRS is not currently investing. The prior policy restricted co-investing alongside existing managers. The policy also removes a restriction that co-investments be made on the same or better terms as provided to the limited partnership. This requirement had precluded private equity co-investments with a potential lower return than the limited partnership investment but with stronger downside protection as with preferred equity. CalSTRS now limits its maximum participation to 50% in any private equity co-investment financing round, rather than being limited to investing an amount equal to that of its co-investment partner.
Separately, Mr. Ailman reported that the pension fund returned a net 17% for calendar year 2021, outperforming its benchmark by 140 basis points. The pension fund's return was an annualized 16.1% for the three years ended Dec. 31, outpacing its benchmark by 94 basis points and an annualized 12.1% for the five years ended Dec. 31, outperforming its benchmark by about 78 basis points.
