CalSTRS CIO Christopher Ailman said that the MSCI and Bloomberg indexes are common investment options for individuals and would be a simple benchmark that the average teacher would understand. What's more, the average age of a CalSTRS beneficiary is about 63 and an asset allocation of 70% global equities and 30% fixed income fits the asset mix that might be adopted by the average teacher, Ailman said.
Separately, CalSTRS' $49 billion private equity portfolio underperformed its benchmark in the one-year ended March 31, with -.09% compared to 0% for the benchmark, but outperformed in the longer-term periods, according to a semiannual private equity report. For the three, five and 10 years ended March 31, the fund's private equity asset class returned a net annualized 23.1%, above its 22% benchmark; 15.5% vs. its 13.8% target; and 13.9% vs. 13.4%, respectively. CalSTRS' private markets asset class returns, including private equity and real estate, lag public markets' returns by a quarter.
The private equity market has cooled, but it's still functioning, John Haggerty, managing principal and director of private market investments at Meketa Investment Group, CalSTRS' private equity consultant, told the committee.
"The private equity numbers are a third lower than a year ago," partly as a result of higher interest rates, Haggerty said.
CalSTRS officials committed less capital to private equity in the year ended March 31, amounting to a total of $4.2 billion, down from $5.9 billion in the prior 12-month period and $12.8 billion in the 12 months ended March 31, 2021, a Meketa report showed. CalSTRS staff restrained private equity commitments, using strategies including not making commitments to funds of lower-conviction managers, lowering commitment sizes or deferring commitments to fiscal year 2024, Haggerty said.
CalSTRS staff is exploring a possible sale of private equity assets on the secondary markets, Haggerty said. However, a portfolio sale on the private equity secondary markets is hard to do without taking a discount on assets of 10 to 20%, he noted. CalSTRS is also looking at "borrowing options for the private equity program," Haggerty said.
The returns of CalSTRS real estate portfolio were also hurt by the higher interest rates in the year ended March 31, said Ben Maslan, managing director at the pension fund's real estate consultant RCLCO Fund Advisors at the committee meeting during the semiannual real estate review. CalSTRS' $50.8 billion real estate return was -.8% for the year, above its -3.9% benchmark. For the three, five and 10 years ended March 31, real estate returned 10.5% vs. its 7.5% benchmark; 9.2% vs. a 6.6% benchmark; and 10% vs. 8.5%, respectively. However, RCLCO executives expect real estate valuations to continue to decline over coming quarters, Maslan said. Real estate appraisers are slow to mark down values, he said.
The real estate markets are down 15-20% from the prior fiscal year due to interest rates being higher for longer, Taylor Mammen, CEO of RCLCO Fund Advisors told the committee.
However, CalSTRS staff sees investment opportunities in this market, particularly in real estate debt, Mammen said. CalSTRS is lending where other lenders are on the sidelines, he said.