Return to search

$6bn CalSTRS' plan prompts RE allocation rise

The California pension is set to create a $6bn securities portfolio targeting distressed sellers that will cut across all asset classes. To make room for the portfolio, the pension is shifting its asset class allocations, including increasing allocations to real estate and private equity.

The California State Teachers’ Retirement System is preparing to buy securities held by distressed sellers as well as non-distressed, discounted debt across all asset classes in an effort to take advantage of the financial market turmoil.

The $119 billion pension is planning to create a $6 billion “equity return” portfolio that will focus on distressed securities sellers, distressed-priced debt and high-yield bonds with returns of 15 percent or more. The portfolio, CalSTRS said in board documents, would hold assets from various classes like private equity, real estate and fixed income.

In order to facilitate the move, CalSTRS is planning to increase its target allocation to real estate 2 percent to 13 percent.

“In the wake of the current financial crisis, [CalSTRS will] consider an opportunistic move into debt instruments that currently offer equity-like returns due to the lack of capital in the financial market,” the pension said in documents.

A CalSTRS spokeswoman said the portfolio would be different from distressed debt investments, a strategy the pension is already involved in. The measure is to be discussed at the pension’s investment committee level next week, and the full board will have to vote to approve it.

The equity return portfolio would be funded with $6 billion, or 5 percent of the total fund. The pension has already reserved $1 billion for the programme. The equity return portfolio will only exist “as long as the current capital crisis continues”, the pension said.

“This tactical investment is an alternative to investing in US and non-US equities. We know from history that the equity markets will turn and rebound; however, the challenge is identifying the bottom,” the pension said. “CalSTRS should not try to pick the bottom in the equity market, but rather shift an allocation from global equity and allocate those assets across the remaining three asset classes to take advantage of the unique opportunity.”

To make room for the portfolio, CalSTRS is shifting its allocations to various asset classes, which the board will consider approving at its 5 March meeting.

The board will consider increasing the long-term target for real estate to 13 percent, up from 11 percent, with a range of 7 percent to 19 percent. That marks an increase from the former ceiling of 17 percent.

CalSTRS is looking to increase its allocation to private equity to 11 percent from 9 percent, with a range of 5 percent to 17 percent, up from the former ceiling of 15 percent the pension approved in November. CalSTRS will decrease its allocation to global equity by 5 percent to 55 percent, and lower its allocation to total equity by 1 percent to 79 percent.

“The shift in March is to make room for the equity return portfolio … if we add to fixed income or private equity, we have to take away from somewhere. The most likely place to take away from is the global equities portfolio, which is underperforming,” a CalSTRS spokesman said.

CalSTRS will consider increasing its private equity and real estate allocations a further 3 percent in July as part of its general 2009 asset allocation study.