CalSTRS Thanks Alternatives for Positive Returns

The pension credited its 12.3% return for the 2009 to 2010 fiscal year to a greater allocation to alternative investments.

(July 21, 2010) — The $129.8 billion California State Teachers’ Retirement System (CalSTRS), the nation’s second-largest public pension fund, posted its first gain in three years, partly attributing its growth to successfully boosting its allocation to alternatives.

“We’ve taken steps to position the portfolio for long-term growth, but we’re not out of the woods yet,” said Chief Investment Officer Christopher Ailman. “The American economy suffered a near-death experience in 2008, and it’s going to take some time to fully recuperate from that. This year’s performance is a solid start along that road to recovery.”

In the year ended June 30, the plan returned 12.3%, boosted by a 21.7% return in its private equity portfolio. After falling by about 25% in its last fiscal year, the CalSTRS Board and investments staff is seeking recovery by:

  • Expanding its target asset ranges to avoid having to sell at a loss.
  • Temporarily shifting 5% of the portfolio from global equities to fixed income, real estate and private equity to take advantage of the distressed market.
  • Permanently shifting 5% of the portfolio from global equities to create a new absolute return asset class for inflation-protection.
  • Adopting a new asset allocation mix to further diversify the portfolio and decrease its stake in the global stock market.
  • Launching the Innovations and Risk unit to explore new investments such as a macro global hedge fund strategy, commodities and microfinance.

As of June 30, 2010, the portfolio holdings consisted of 51.7% in U.S. and non-U.S. stocks, 22% in fixed income, 14.5% in private equity, 10.1% in real estate, 0.9% in absolute return assets and 0.8% in cash. Its five-year strategic asset allocation targets are 47% U.S. and non-U.S. equities; 20% fixed income; 15% real estate; 12% private equity; 5% absolute-return strategy for inflation protection, including hedge funds, infrastructure and commodities; and 1% cash.

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Separately, the fund today issued a statement applauding financial regulatory reforms, joining with its partner state pension funds and plan sponsors in applauding meaningful financial regulatory reforms signed into law today by President Obama.

“We now have in place safeguards to help prevent a repeat of the 2008 market collapse which has hurt all investors, large and small,” the fund said in a statement. “We also have tools for investors that will bring appropriate transparency, accountability, and management of risk at the corporate level. Regulators and investors must remain vigilant and alert to restore and maintain the integrity of our capital markets and the accountability of its participants.”



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

Following the Crash and Nassim Taleb, Firms Start to Offer Black Swan Protection

PIMCO is the latest vendor with plans to offer protection against violent market swings following the 2008 collapse and warnings by commentators such as Nassim Taleb of “Black Swan” fame.

(July 21, 2010) — Following the crash of 2008 and the rise to prominence of commentators such as Nassim Taleb, financial firms are increasingly looking to market products aimed at helping firms protect against ‘Black Swan’ events.

According to reports, Pacific Investment Management Co. (PIMCO) – the giant west-coast fixed-income specialist – is planning on offering investors a product that would protect against a 15% drop in market value. Deutsche Bank and Citigroup also offer products that provide hedging against “tail risk” events, now more commonly known as “Black Swans” after the rise to prominence of finance author Nassim Taleb.

“How should institutional investors invest?,” Taleb asked ai5000 earlier this year. “Exactly my barbell idea in which one keeps high cash reserves while taking aggressive risks but with a small portion of the portfolio.” However, Taleb has expressed a belief that few funds will be able to stick with such a strategy and the products used within it. “They will drop like flies,” Taleb is quoted by Bloomberg as saying. “They and their customers will give up at some point. I’ve seen it before.”

Regardless of investor staying power, the logic behind such products is commonly accepted. “Everyone is starting to realize that this is going to be a much longer, much more difficult path to recovery,” says State Street’s William Cunningham, according to Bloomberg. “It’s really quite fragile and vulnerable in a way that we haven’t seen in our lifetime.” At least some investors, including the Indiana state public pension fund, have expressed interest in such products.

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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

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