CalSTRS' investment committee approved the ability to temporarily leverage the entire portfolio by up to 10% to smooth out cash flows and rebalance the portfolio.
"At this juncture, staff needs better flexibility to exercise discretion and add value," said Scott Chan, deputy chief investment officer at the Jan. 11 investment committee meeting of the $304.9 billion California State Teachers' Retirement System, West Sacramento.
At the same meeting, the committee also expanded how far each asset class can stray from its target asset allocations before the portfolio must be rebalanced back to targets.
Staff needs discretion on certain decisions, Chan said, such as "when to rebalance the portfolio, when to use potential leverage to smooth out negative cash flows, particularly during market disruptions and when to sell assets, if any."
Historically, staff has been able to use up to 5% total fund leverage.
During the COVID-19 shutdowns in 2020, staff used derivatives to prevent the public markets portion of its portfolio from moving too far away from target allocations, said Geraldine Jimenez, senior investment director, at the same meeting. If staff had not employed derivatives at the time, the public markets portfolios would have become 12% underweight, she said. Instead, they were about 8% underweight, Jimenez said.
CalSTRS' new leverage policy does not introduce strategic permanent leverage into CalSTRS' portfolio; it allows staff to introduce leverage when leverage would benefit the portfolio, said Stephen P. McCourt, managing principal and co-CEO of Meketa Investment Group, CalSTRS' general investment consultant.
Separately, CalSTRS extended Meketa's contract for six months, to Dec. 31, to give pension fund officials time to launch an RFP. The contract was sent to expire on June 30.
The additional six months will give the board time to process the request for proposals starting in July, with proposed interviews scheduled for September and final selection at the November meeting.
The reason CalSTRS plans to launch an RFP is because CalSTRS has exercised all of the extensions in its current contract with Meketa.
Meketa is eligible to rebid.