Updated with correction
CalSTRS on Wednesday adopted a new long-term asset allocation that boosts inflation-sensitive assets, real estate and risk-mitigating strategies but cut equities.
The $242.1 billion West Sacramento-based California State Teachers’ Retirement System increased its real estate and inflation-sensitive assets long-term targets from its prior long-term targets by 2 percentage points each to 15% and 6%, respectively; and risk mitigating strategies by 1 percentage point to 10%.
At the same time, CalSTRS reduced its long-term public equity allocation by 5 percentage points to 42%, while retaining its 13% private equity, 12% fixed income and 2% cash liquidity allocations.
The new long-term asset allocation is designed to shift the portfolio allocation from the economic growth risk of public equity to real assets for diversification benefits and more stable income, according to a report to the committee. Even though real assets returns are expected to be a bit lower than public equity, CalSTRS executives expect the relatively more stable income-driven returns will reduce portfolio risk.
According to a pacing plan provided by CalSTRS private equity and inflation-sensitive program consultant Meketa Investment Group, CalSTRS would commit an estimated $7.5 billion annually to vintage years 2020 and 2021 funds, with commitments gradually increasing to $12 billion in vintage year 2030 funds.
It's infrastructure pacing model would commit an estimated $850 million to closed-end and $450 million to open-end infrastructure funds annually from 2020 to 2022, with the closed-end fund commitments increasing slowly to an estimated $1.1 billion by 2030, according to Meketa's inflation sensitive program pacing plans. CalSTRS' commitments to open-end infrastructure funds will remain constant at $450 million a year during the period.
CalSTRS' pacing plan for its farmland and timber portfolio, which is part of its inflation-sensitive program, calls for annual commitments of an estimated $40 million to closed-end funds and $40 million to open-end funds from 2020 to 2030.
A report by CalSTRS' real estate consultant RCLCO Real Estate Advisors said that the increased real estate allocation would translate to an additional $3.2 billion to the net asset value of CalSTRS' $32.6 billion real estate portfolio. To bring the portfolio up to the new allocation, staff is considering several scenarios, including reducing leverage, becoming a net buyer rather than a net seller, and investing in liquid real estate securities and open-end funds. Earlier this year, CalSTRS made its first allocation to REITs, up to $500 million through two managers, CenterSquare and Principal. CalSTRS could increase its investment in REITs, according to the report.
CalSTRS staff is expected to return to the investment committee with an implementation plan in January.