CalSTRS Takes a Look at Other Allocation Options

After clocking in a 6.8% return in its most recent fiscal year, the California State Teachers’ Retirement System (CalSTRS) took part in its once-every-four-years asset allocation study to identify opportunities for better returns and lower risk levels.

The current asset allocation policy, which seeks to achieve a 100% funded ratio by 2046, mostly through investment returns (61%), employer contributions (18%), state contributions (11%), and member contributions (10%), was put against five other potential asset allocations for the $236.9 billion portfolio.

The candidate portfolios being evaluated are illustrated here:

Source: CalSTRS

The current allocation is the second from the right, denoted with a 7.2% long-term expected return net of expenses. The encircled bar represents CalSTRS’ current long-term asset allocation policy portfolio.

Metrics for each hypothetical scenario, including potential returns, and their respective risk of failing to meet 100% funding by 2046, are illustrated here:

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Source: CalSTRS

“The principle of a risk-return tradeoff for portfolio returns also extends to liability metrics,” CalSTRS’s investment committee said in a statement. “Achieving a higher chance of reaching full funding by 2046 involves higher portfolio risk and a higher chance of a low funding level before 2046 due to the increased investment volatility.”

Another element CalSTRS is considering in risk to rewards trade-offs are the influence of each strategy’s return profile, and the subsequent potential increases in contribution rates to make up for any potential shortfalls. Each portfolio’s chances of influencing contribution rates, for better or for worse, are shown here:

Source: CalSTRS

CalSTRS and its investment consultant, Meketa, are going to consider further refined potential portfolio allocations in September, and approve their favorite in November 2019. Subsequently the investment committee will adopt a long-term asset allocation in February 2020.

Tags: Asset Allocation, Asset Review, California, CalSTRS, Pension

The Washington State Investment Board (WSIB) has made up to $650 million in commitments to two private equity funds.

WSIB said in a press release that up to $350 million was committed to Apax X, L.P., a global buyout fund with a target size of $10.5 billion.

Washington State investment officials say they have had a 20‐year partnership with the fund’s manager, Apax Partners, investing in five previous funds since 1998.

In addition, up to $300 million was committed to Warburg Pincus China Southeast Asia II, L.P. The fund has a target size of $3.5 billion and is being raised by Warburg Pincus LLC. WSIB has had a 24‐year partnership with Warburg Pincus, investing in 12 previous funds since 1994, pension plan officials say.

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The commitment to both private equity funds was made by WSIB investment staff using delegated authority, the press release noted.

WSIB Trustees did not have to approve the commitments. Both were recommended by WSIB private equity consultant Hamilton Lane. Since late February, WSIB has made more than $3.6 billion in new commitments to private equity.

The commitments are part of a plan to keep up the large percentage of pension plan assets that are devoted to private markets.

It comes as other WSIB funds are being liquidated as their investment cycle wraps up. As of March 31, the latest numbers reported, private equity made up 20.98% of the $104 billion pension fund’s overall assets.

With $21.8 billion invested, WSIB has one of the largest overall investments in private equity among institutional investors in the US.

Its 20.98% allocation is also more than twice as large as those of the two largest US pension plans, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).

Building on long-term relationships, WSIB Chief Investment Officer Gary Bruebaker and his private equity investment staff have been able to obtain new commitments in private equity funds on a consistent basis from top performing managers—despite increasing competition from other institutional investors.

CalPERS and CalSTRS officials have tried to increase the size of their private equity programs, but due to the difficulty of getting into all the new PE funds they want, hey have both faced shrinking programs.

When other private market programs are also counted, such as real estate, infrastructure, and tangible assets, WSIB has an approximate 40% allocation to private markets. Such an allocation is unique among public pension plans and is more typically found in the asset allocation of college foundations.

Bruebaker is retiring at the end of this year after 18 years at WSIB. The pension organization is conducting a national search for his replacement.