CalSTRS Takes a Different Approach to Private Equity

The California State Teachers Retirement System (CalSTRS) is the largest teachers retirement fund in the United States, and is the 11th largest public pension fund in the country. The journal Pensions&Investments reported on March 28, 2019 that CalSTRS revised its asset allocations for 2019 to bring them into line with the funds long-term goals. According to the article, "CalSTRS raised its allocation to inflation-sensitive assets, private equity and real estate by 1 percentage point each to 3%, 9% and 13%."

The 9% private equity target is considerably lower than the 16% private equity target currently being considered by CalPERS. Although the article does not state so explicitly, there is no indication that CalSTRS intends to set up its own "captive" private equity operations as CalPERS currently is considering. Presumably, CalSTRS private equity investments would continue to be made through existing private equity funds.

Two other interesting pieces of information can be gleaned from the Pensions&Investments article. The first is that CalSTRS is considering the adoption of a "risk budget." A risk budget is constructed by using quantitative analyses to determine the risk associated with each component of an investment allocation plan, then using this information to determine the overall risk associated with the investment plan, and then deciding how much total risk can be tolerated in the overall asset allocation plan.

The second interesting item contained in the article is that CalSTRS implemented a "Low-Carbon Index" of publicly-traded U.S. companies in 2017, and plans to extend this index to include investments in both developed and developing markets outside the U.S. this year. When these investments are completed the CalSTRS Low-Carbon Index will include some $2.5 billion in total investments. This index is managed "in-house" and returned 14.79% in its first year of operation.