CalSTRS to Rely More on in-House Assets | Chief Investment Officer

(July 9, 2010) — In a meeting today, the $132.1 billion California State Teachers’ Retirement System (CalSTRS) will be exploring ways to boost the use of internal asset management, reducing the $140 million in fees the fund paid to external managers in the last fiscal year.

“…We believe there are areas within the portfolio where internal asset management may be more effective and efficient,” said a CalSTRS investments business plan for the 2010-11 fiscal year, written by chief investment officer Christopher Ailman and staff.

The West Sacramento-based system said it will be considering whether to slash the number of external money managers it will use in the fiscal year that started July 1. It will conduct a review of its external managers to make sure it is only partnering with “highest conviction” managers while continuously exploring new sources of alpha.

Currently, outside managers oversee 25% of the fund’s US equities strategies, 50% of its global equity portfolios and 20% of its fixed-income strategies.

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CalSTRS staff have already managed a Russell 1000 passive portfolio for more than a decade. In April, it began managing a $500 million Russell 2000 passive portfolio in-house and will now consider managing the remaining of its passive management internally in the first half of 2011.

The meeting will begin at 11:30 am ET (8:30 am PT) today, webcast live from www.calstrs.com, CalSTRS spokesman Ricardo Duran confirmed with ai5000. The fund’s CIO Christopher Ailman will be presenting the business plans.

Other funds have increased the in-house management of its assets to save in external management fees and boost efficiency. Leo de Bever the CEO of Alberta’s AIMco — the corporation created to manage the province’s pension and sovereign wealth fund — spoke positively of internal private equity teams to ai5000. “I paid [US $160 million] in external fees last year,” he said in a December interview. “I think we can cut that down by four times if we move some of it internally.” His outlook mirrors other large Canadian institutions, which have created internal teams to pursue direct investments and avoid external fees.

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

Hector Mayol, the system’s Administrator, notes that required benefit payments are eating into investable capital, but that the Commonwealth’s Governor is now setting his sights on the pension problem.

(July 8, 2010) — America’s most poorly funded public pension plan, the Puerto Rico Employees’ Retirement System, is falling even farther behind.

With a funding ratio of just 9.7% — down from 16% in 2009, a result of required benefits eating into the investment portfolio – the Puerto Rico Employees Retirement System is in even greater straits compared to last year when they were profiled by ai5000. In a recent interview, system Administrator Hector Mayol acknowledged the point, noting that it was not so much poor investments, but a structural issue, that was causing further declines. “Valuations show that the required cash flow (for benefit payments) is eating into our investment portfolio,” Mayol noted. “Unless something is done, 2017 or 2018 look like the date where we run out of cash – but because of these cash-flow issues, it’s probably closer to 2014 or 2015, or even earlier. Right now, we’re liquidating a whole bunch of assets to cover the June 30 fiscal year end,” Mayol noted.

There is one bright spot, however: According to both Mayol and other sources, Puerto Rico Governor Luis Fortuno will dedicate the coming fiscal year to tackling the emergency at the pension system. For the past twelve months, Fortuno’s primary focus has been on reducing the Commonwealth’s steep deficit.

In addition to pronouncements of where he will devote his attention, Fortuno recently announced the appointment of a commission of experts to study pension fund reform, beginning work in early May. The goal will be for the commission to present recommendations to the governor, with legislation hopefully presented during the 2010/2011 session. “There are no preconceived ideas yet,” Mayol stated, referring to the potential solutions that the commission is likely to produce “Raise revenues, cut benefits – everything is on the table.”

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Despite the developments to improve Puerto Rico’s pension, Mayol said he has a realistic set of expectations to make-up the system’s $20 billion in actuarial deficit (including the Commonwealth’s Teachers’ fund, which Mayol also oversees). “I think that some progress will be made,” he said. “I am not 100% confident that it will be a fully permanent solution in the sense that we will see the assets begin to grow. I hope to see some room in future budgets for contribution increases; on the other hand, cutting back on benefits is possibly something that has to be taken a look at. Of course, this is politically sensitive.”

<p>To contact the ai5000 editors of this story: Kristopher McDaniel at <a href="mailto:kmcdaniel@assetinternational.com">kmcdaniel@assetinternational.com</a> and Paula Vasan at <a href="mailto:pvasan@assetinternational.com">pvasan@assetinternational.com</a></p>