Home ListingJune 6, 2013

CalSTRS Votes on Portfolio Risk Factors

<em>The Sacramento pension fund is set to vote on which risk factors it prefers—and how its investment policy will change.</em>

Reported by Featured Author

(June 6, 2103) — The investment committee of the $164 billion California State Teachers Retirement System (CalSTRS) is to vote today on the risk factors that will determine the direction of the pension fund’s portfolio.

In October last year, Chris Ailman the fund’s CIO, announced CalSTRS would consider this method of assessing its needs, and the most efficient way of finding investment returns to meet them.

At a monthly meeting in Sacramento today, each member of the committee will be given a free vote on how to weight a choice of four factors, which were chosen at a previous meeting.

The move is part of a shift by large institutional investors to base their investment decisions on risk factors, rather than arbitrary-and often inefficient-portfolio diversification models.

CalSTRS’ pre-determined decision factors are:

Return-oriented: Seek relative improvement to the projected funded status path over next 30 years
Return-oriented: Seek to maximize the 20-year geometric real return
Protection-oriented: Avoid significant asset drawdowns within next 10 years
Protection-oriented: Minimize likelihood of PAYGO status beyond 10 years

After deciding on these factors, the committee had requested to see a series of potential policy portfolios and their behaviour under two separate state-level funding scenarios: keeping the status quo or increasing contribution levels by 3%.

Today, committee members will be given a series of likely outcomes to consider before making their decision, which will be done anonymously.

The purpose of the exercise is to “develop a consensus risk philosophy/risk tolerance through deliberation and prioritizing major plan risk issues,” according to an agenda pack published ahead of the meeting. The meeting agenda warns: “Emphasizing one or more of the decision factors versus others can alter policy significantly.”

The panel will be given the option to discuss the weighting decisions and reconsider their initial view after all the votes have been cast. By the end of the 90 minute meeting, the committee should have a clear risk philosophy, the agenda says.

“In light of the final risk philosophy, the investment committee will then discuss the merits of the resulting policy portfolio; Investment committee and staff may choose to modify the policy portfolio based on qualitative and implementation considerations,” the document states.

By the end of the day, CalSTRS could have an entirely new investment direction.

To read the agenda document with full detail on scenarios and asset class assessments, click here.

For an in-depth look at the evolution of risk-factor investing, don’t miss the next edition of aiCIO, published later this month.