What’s Inside The California State Teachers’ Retirement System Portfolio?

The teachers’ pension scheme made real estate its top asset class

The California State Teachers’ Retirement System (CalSTRS portfolio) announced its latest asset allocation shifts this week.

The $242 billion dollar scheme is shifting assets away from traditional equities. The pension fund is tapping into inflation-sensitive assets, real estate, and risk-mitigating strategies.

The CalSTRS portfolio saw an increased allocation to real estate to 15% of the total portfolio.

It also announced that inflation-sensitive assets will comprise 6% of the portfolio going forward. The public equity portion decreased by 5% to 42% of the total fund. The rest of the asset mix will remain unchanged.

It currently allocates 13% to private equity, 12% to fixed income and 2% to cash liquidity allocations.

California State Teachers’ Retirement System Updates

First, let’s breakdown the new allocation to real estate.

The plan will now create a new $500 million allocation to REITs. The fund could also deploy this allocation immediately.

Earlier this year CalSTRS hired its first REIT Manager, Principal Real Estate Investors. It also selected CenterSquare Investment Management to help deploy the newly allocated capital.

Chief Investment Officer Christopher Ailman addressed the CalSTRS board and discussed relative valuations in the portfolio.

“Valuations for the public asset classes have decreased in the past few weeks,” Ailman said. “Prices remain relatively high for U.S. equity, private equity, and real estate. The U.S. market continues to have the highest public equity valuations, and non-U.S. and emerging markets equity have relatively inexpensive valuations by historical standards.”

Dissection the CalSTRs Portfolio

Here’s what I find interesting about the comments from Christoper Ailman on the CalSTRs portfolio.

The fund has allocated 74% of capital to U.S.-based assets. Meanwhile, most of the foreign exposure falls in developed markets in Asia and Europe.

Further, a very small percentage of total assets center around emerging markets. This is also surprising given the lower valuation levels in emerging markets compared to U.S. and other developed markets right now.

The fund also reported that portfolio management costs fell substantially.

CalSTRS didn’t notice a decline in fees charged to manage the portfolio.

The decline was a result of private equity firms selling fewer companies in the past year. Incentive fees are paid upon the sale of the companies in the portfolio so the lack of realization activity caused incentive fee payments to decline by 36% during the year.

Finally, for the year ended June 30, 2019, CalSTRS earned a total return of 6.8%.

By: Tim Melvin

Related: CalSTRs Bets Big on Private Equity in H1 2019


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November 20, 2019

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