CalSTRS is considering adding an opportunistic asset class as well as leverage to certain asset classes to counter lower anticipated returns, resulting from a low interest rate environment over the next 10 years.
Christopher Ailman, CIO of the $257.9 billion California State Teachers' Retirement System, West Sacramento, raised both ideas as strategies the board might consider at Wednesday's investment committee meeting.
"Target returns will be harder to achieve," Mr. Ailman said, referring to a Meketa working paper on the low interest rate environment, shared by Allan Emkin, managing principal of CalSTRS' investment consultant Meketa.
Mr. Ailman said his takeaway was that investors need to be both agile and stay the course. He said he was proposing the board look at a new opportunistic asset class of 5% to 10% to allow CalSTRS to be nimble.
But Mr. Ailman cautioned that an opportunistic portfolio is a challenge because it can both add and cost returns. Also, he said that he is not advocating for additional investment discretion.
As for leverage, Mr. Ailman said that he did not think that leveraging the entire plan is a good strategy for CalSTRS. However, he did think that if the fund might be able to take advantage of the low interest rate environment by borrowing on a portfolio level in real estate, infrastructure and possibly private debt.
But he said that CalSTRS would have to focus on using leverage, which it would borrow directly from financial institutions "opportunistically and cautiously."