CalSTRS increases alternatives allocation

The $147bn pension has responded to the denominator effect by increasing the amount it is allowed to invest in private equity to 15% of total assets. CalSTRS has similarly bumped its real estate allocation.


The California State Teachers' Retirement System has increased its acceptable private equity allocation to 15 percent in an effort to counterbalance its over-weighted portfolio.

As of 30 September, 12 percent of CalSTRS' investment portfolio was comprised of private equity; its acceptable allocation range for the asset class was between 4 percent and 11 percent with a target of 9 percent.

Under the new allocation policy approved today, the $146 billion pension can invest up to 15 percent of its portfolio in private equity, with a minimum threshold of 3 percent. CalSTRS' long-term target for private equity has remained unchanged at 9 percent, although that figure could be altered when the pension conducts an annual review of its portfolio early next year.

CalSTRS' similarly over-weighted real estate portfolio also received a bump in its allocation range. The pension currently is allowed to invest between 4 percent and 13 percent of its portfolio in the asset class. Those limits have been boosted to between 5 percent and 17 percent.

The pension’s actual allocation to real estate stands at 14.4 percent, well above the long term target of 11 percent.

Chief investment officer Christopher Ailman told the CalSTRS board of directors that a return to previously held ranges would require a significant decrease in the volatility of the markets and a return to normal behavior in the credit markets, according to CalSTRS spokesman.

However, the spokesman stressed that the expansion of the allocation ranges was an “interim measure”, and that the pension will revisit the ranges in July.

The move is a major shift for CalSTRS and is meant to avoid the automatic portfolio rebalancing triggered when an asset class becomes over-weighted.

The pension has not altered its target allocation range for private equity, real estate, and cash since 2001, when it approved a plus or minus two percent range for private equity, real estate and cash.

That range is tighter than the average public pension plan, which uses a plus or minus five percent range for all asset classes, according to CalSTRS committee documents.

“Due to the decline in global equity values and, on the other hand, the illiquidity and static value of private equity and real estate the allocation to those areas has well exceeded their policy ranges,” staff wrote in public CalSTRS investment committee documents.  “With the market volatility and lack of liquidity, it is not prudent to be forced into automatic rebalancing.”

In an effort to achieve that kind of flexibility, CalSTRS also doubled its allowance for public asset classes, which have dipped well below their target allocations as a result of the precipitous decline in public markets both in the US and abroad.

Like CalSTRS, institutional investors around the world are confronting over-weighted alternatives allocations, which are restricting their ability to commit to private equity and real estate funds.

Instead of hiking their private equity allocations, many investors have taken to the secondaries market to help alleviate over-weighting problems.

The Harvard University endowment is attempting to sell $1.5 billion in private equity partnerships managed by firms including Bain Capital, according to a report in the Wall Street Journal.