CalSTRS Aims for New $2 Billion Sustainable Portfolio

Pension plan officials believe they can build a new private markets allocation without sacrificing investment targets.


The California State Teachers’ Retirement System (CalSTRS) plans to build a private markets sustainable investment portfolio to go greener while aiming to maintain its investment returns.

The investment committee of the $282.5 billion pension system, the largest teachers’ retirement fund in the world, is expected to approve the new portfolio at its meetings next week. 

The pension system’s plan calls for investments of $1 billion to $2 billion in the next couple of years—much of it in real estate affordable housing investments, as well as in private equity and infrastructure—according to CalSTRS investment committee material. 

“We’re focused on the intersection of excellent positive investments and the sustainability-related shifts that are occurring in the global economy,” Kirsty Jenkinson, CalSTRS head of sustainable investments and stewardship strategies, told the investment committee on Jan. 27.

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CalSTRS already has one of the largest sustainable investment portfolios among pension systems in the US. It invests $8.7 billion in various equity strategies: a low-carbon index, activist managers, and sustainability-focused managers.

The new plan would put $250 million to $500 million a year in affordable housing investments. The pension plan’s private equity team would also deploy $150 million a year in low-carbon investments through co-investments. 

A third effort would focus on renewable energy investments through CalSTRS’ infrastructure portfolio. CalSTRS officials have not said exactly how much they aim to invest yearly in sustainable infrastructure opportunities.

Infrastructure investments make up about $7 billion of CalSTRS’ overall portfolio. They are dwarfed by its $36 billion real estate portfolio and $29.5 billion private equity portfolio.

The pension system has been studying adding private market sustainable investments for several years, but officials said the election of President Joe Biden is helping fuel the decision. 

CalSTRS CEO Jack Ehnes told The Financial Times in December that the results of the presidential election will impact transition strategies to a low carbon environment.

“The policies of the Biden administration will likely produce a number of opportunities for investors with sustainable investment strategies,” he said. “We will probably be accelerating our path to low carbon.”

Affordable housing is an attractive investment because of stable cash flows, high occupancy rates, low turnover, and the benefit of favorable debt being provided by governmental entities, Julie Donegan, a CalSTRS real estate manager, told the investment committee at its January meeting.

“The demand for affordable housing is large and growing,” she said. “The supply of new products is limited due to the high cost of land as well as production. Existing supply is also being reduced or at risk of being reduced by traditional value add investors who acquire these properties, upgrade and increase rents, and then turn them into market rent properties.”

Investment committee members expressed enthusiasm for the affordable housing component of the plan, and particularly in making California investments that would help residents in the state’s high-cost housing rental market.

“Speaking for myself, I would like more visibility into the activity in this endeavor as it unfolds,” said CalSTRS Investment Committee Vice Chair Harry Keiley, a Southern California high school teacher. “It secures and preserves affordable housing in California. Many people are just a paycheck away from being in the streets.”

CalSTRS’ plan for sustainable private equity investments calls on the pension system’s investment staff to source co-investments as it makes annual commitments of approximately $2 billion to limited partnerships in private equity funds.

“Our inherent belief is that the transition to a low carbon economy is creating opportunities to invest in solutions that are going to help the world,” Margot Wirth, CalSTRS’ director of private equity, told the investment committee at the January meeting.

Wirth said sustainable private equity deals include investing in water and waste management and food security.

She said infrastructure investments could include wind and solar power and other renewables. CalSTRS has about $500 million currently invested in renewable energy strategies.

Ultimately, the success of the new CalSTRS portfolio will be judged on investment returns, something pension system officials say they won’t sacrifice in making allocations to the new approach.

The pension system’s public market sustainable returns have been mixed. They achieved a 6.85% return over a three-year period ending June 30 and a 1.94% return over a one-year period. 

CalSTRS returned 3.9% in the 2019-2020 fiscal year. It shoots for an expected return of 7% a year and is only about 66% funded.

As it continues to build sustainable investments, CalSTRS remains under pressure from education groups to divest its $6 billion fossil fuel portfolio. Groups including the United Teachers of Los Angeles and the California Federation of Teachers have joined environmental organizations in calling for divestment of stock in fossil fuel companies. 

Pension plan officials have insisted that holding stock positions in fossil fuel companies allows them a vote at the table in transforming energy companies to a low-carbon future.

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Expect a Market Correction, Sam Stovall Warns

A bunch of indicators like high sector P/Es and king-sized margin debt suggest one is on the way, stock savant says.


Are we overdue for a market correction? Sam Stovall thinks so. After the past few days’ slide (the S&P 500 did blip up Tuesday by 0.13%), CFRA Research’s chief investment strategist sees several signs that a 10% or so downdraft could be coming in the near future.

These indications, ranging from fundamental measures such as high margin debt to technical metrics like 200-day moving averages, prompted Stovall to write in his recent research report: “It’s not a question of ‘if’ but ‘when.’”

Corrections (downturns between 10% and 20%), of course, are uncomfortable episodes, and they’ve cropped up sporadically during the long bull market.

We had a near-miss in September, amid worries about Congress passing new economic aid and the rise of political opposition to Big Tech’s influence: The S&P 500 fell 9.6%. And we also endured a monster crash almost a year ago, when the index swooned 33.9%. That fright fest since has reversed itself, and then some.

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Let’s be clear: Stovall is no Cassandra. In his note, he argued that downdrafts are inevitable and even healthy. In a long-term optimistic “Hakuna Matata” refrain that would do The Lion King proud, he counseled that “every pullback, correction, and bear market has eventually recovered.”

But face the facts. When they happen, market falls are plain damn painful. What Stovall sees as portents of a possible correction are:

  • The S&P 500’s market value sits at an all-time high of 140% of US gross domestic product (GDP). That’s compared with a six-decade average of 62%.

  • Margin debt also is at an all-time high, whether measured against the S&P 500 or GDP. When investors get highly levered, that’s usually a time to worry because they get a double-whammy when the market tanks.

  • Every major S&P 500 sector, other than health care, is trading at double-digit premium to its 20-year average price/earnings (P/E) multiple. For the S&P 500 itself, the premium is 37%, and the sectors span a wide distance between 12% and 93%.

  • The small cap benchmark Russell 2000, versus its 200-day moving average, is at a record of more than 40%. That testifies to small-caps’ remarkable resurgence.

Over the past quarter-century, the stock market has had 11 big declines, Stovall reported—with eight corrections and three bear markets. During those spells, the three highest-performing major sectors, during the six months prior to the dips, lost on average 31.7% and the best sub-industries dropped 43.9%.

The sub-sectors doing the best recently: agricultural and farm machinery, apparel accessories and luxury goods, automobile parts and equipment, Stovall wrote.

Auto makers, broadcasting, copper, investment banking and brokerage, real estate services, regional banks, and semiconductor equipment have also done well.

When the selloff is over, the three worst-suffering sectors climbed an average 30.6% over the next six months, while the S&P 500 increased just 25.2%, according to Stovall. The 10 worst performing sub-sectors went up an average 42.7% in the same period.

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