After Huge Losses in RE, CalSTRS Revises Allocation

(June 3, 2010) — The investment committee of the $138 billion California State Teachers’ Retirement System (CalSTRS) is expected to vote on a revised policy for its $12.7 billion real estate allocation.

CalPERS’ decision to revise its real estate portfolio comes after the fund suffered huge losses in the 2008 to 2009 fiscal year as the value of its real estate investments fell more than 40%.

According to meeting agenda, the Investment Committee has been reviewing and making major changes to the fund’s real estate policy since September 2009. The new allocation would encompass an increase in its core investments to 50% of the portfolio from the current 30%. The fund would also put a cap on its holdings of higher-risk commercial properties to no more than 30% of its portfolio — the current policy allows as much as 70% in such investments. The proposed changes would additionally split its tactical allocations to a value added, at 20% of the portfolio, and opportunistic, at 30%, Pensions & Investments reported.

If approved, the next phase of the plan would take three to five years to implement and would include, 1) Categorizing the portfolio into the new definitions of core, value add, and opportunistic; 2) Deleveraging the portfolio to the recommended leverage ratios in the policy; 3) Stabilizing and/or deleveraging specific existing assets and subsequently shifting those investments into lower risk categories (typically value add assets shifting to core).

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Separately, the US public pension fund is set to vote today on a long-range strategic allocation to commodities to hedge against the risk of rising inflation. The fund will add bulk goods such as oil, sugar and copper to its $138.5 billion portfolio of equities, bonds, real estate and private equity.

The move reflects a growing investor desire for raw materials as US federal commodities regulators evaluate the merits of imposing limits on institutional investors’ exposure to raw material markets. CalSTRS’ pull toward commodities follows the investment of the $198.7 billion California Public Employees’ Retirement System (CalPERS), in the asset class.

CalPERS Claims Goldman Concealed SEC Probe

Mounting problems for Goldman: CalPERS claims that when Goldman applied with the fund to become a real estate investment consultant, it misled the fund about it's legal status, specifically stating that it was not "the target of a formal investigation."

(June 2, 2010) — Officials from the California Public Employees’ Retirement System (CalPERS) said they’re looking over the selection of Goldman Sachs Group in the system’s real estate pool, claiming the bank failed to disclose that it faced a Securities and Exchange Commission (SEC) probe.

“We are reaching out to Goldman for an explanation,” said CalPERS spokesperson Clark McKinley to ai5000. He said he is unaware of when CalPERS would take action on the issue.

The bank’s erroneous assurances to the largest US public pension fund in March raises questions on Goldman Sachs’ ethics policies as some question whether the bank concealed information to garner business. The bank’s assurances also raise the issue of whether the bank had an obligation to inform shareholders and potential clients of the SEC’s letter alerting the firm of likely regulatory enforcement action.

The $204 billion pension giant is claiming the Wall Street firm failed to reveal that it was the target of an SEC investigation six months after US regulators notified the bank that it would probably be charged with fraud in connection to the underwriting and marketing of a $1 billion subprime-mortgage-linked security, according to a document obtained by Reuters. The SEC filed a civil suit against Goldman over that transaction of April 16.

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According to Reuters, Goldman assured CalPERS on the bank’s March 18 application to become a real estate investment consultant to the largest US public pension fund.

Since the SEC’s lawsuit, several shareholders have filed lawsuits against Goldman Sachs, claiming investors were harmed by the firm’s reluctance to disclose the SEC notice.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742