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CalSTRS allocates 5% to inflation-linked assets

The $119bn pension’s new ‘absolute return’ asset class will include infrastructure investments and could lead to a search for a manager to run the investment programme. The move is part of a wider asset allocation shift to be unveiled at its August meeting after CalSTRS saw its portfolio value tumble 25 percent over the last year.

The $118.8 billion California State Teachers’ Retirement System (CalSTRS) is set to create an allocation to a new asset class called “absolute return”, composed of inflation-protected assets like infrastructure investments and treasury inflation-protected securities.

The second largest public pension fund in the US will dedicate 5 percent of the fund to the asset class, which will officially be created in August as part of a larger shift in its portfolio allocations. The structure of absolute return has not yet been worked out. It could include a search for a manager to run the programme, but the pension staff has the capacity to make such investments themselves, according to a spokesperson.

The absolute return class will build on previous inflation-linked allocations considered by the pension. Last year, CalSTRS approved a policy that would allocate $1 billion to infrastructure over the next few years.

As part of the wider asset allocation shift, CalSTRS will bump up its contribution to private equity to 12 percent from 11 percent and its allocation to real estate to 15 percent from 13 percent, according to the spokesperson. CalSTRS is also reducing its exposure to global equities from 55 percent to 47 percent and fixed income from 21 percent to 20 percent.

The shift comes as CalSTRS estimates it will see a loss of 25 percent in the fiscal year ending 30 June, 2009. Of its existing portfolio allocations of fixed income, private equity, global equities and real estate, only fixed income posted a gain, 4.5 percent, for the period. Its private equity portfolio fell 27.6 percent, global equities declined 28.2 percent and real estate tumbled 43.0 percent.

CalSTRS, which blamed the declines on an “unprecedented worldwide economic downturn”, said the real estate drop was particularly large because it wrote down the value of its real estate holdings in a single year rather than spreading them out over multiple years.

The $185 billion California Public Employees’ Retirement System (CalPERS) – the largest public pension system in the country – also marked historic declines in its portfolio value over the last year. CalPERS saw a total decline in the value of its assets of 23.4 percent over the 12-month period ending 30 June, 2009.

The market value of its assets stood at $180.9 billion as of 30 June 2009, versus $237.1 billion a year earlier. “It was the most severe single year decline,” the pension said in a statement.

CalPERS has already had an inflation-linked asset similar to CalSTRS’ absolute return for about two years. In 2007, its former chief investment officer, Russell Read, initiated the inflation-linked asset class, which in February 2008 was sub-divided into forestland and inflation-linked bonds and August 2008 was given a 3 percent infrastructure allocation. Randall Mullan, who led the development of the infrastructure programme at the British Columbia Investment Management Corporation, joined the pension in October 2008 to oversee the infrastructure portfolio.

The inflation-linked asset class had declines of 20.9 percent over the 12-month period ending 30 June, CalPERS said.

The pension’s recent infrastructure fund commitments include Carlyle Riverstone Renewable Energy Infrastructure II (2008), Carlyle Riverstone Global Energy and Power Fund IV (2007) and the ArcLight Energy Partners Fund IV (2007), according to fundraising database InfrastructureConnect.

The pension also reported declines in its private equity holdings of 31.4 percent and declines in its real estate holdings of about 36 percent over the 12 months ending 31 March.

To combat the losses, CalPERS has begun negotiating with private equity fund managers for lower fees. The pension also boosted its allocation to private equity from 10 percent to 14 percent in June. At the time, CalPERS said the allocation change was to address the “misalignment of the portfolio in the wake of the financial market crisis of 2008”.

CalSTRS, meanwhile, has created a programme earlier this year called “equity return” to buy “quality” assets from distressed sellers across real estate, private equity and fixed income. The pension diverted 5 percent of its global equities allocation to use in the new programme.

The CalSTRS spokesperson said transactions have been made under the equity return programme but it is unclear how the public reporting process will work for investments made in the programme. 

Christopher Witkowsky contributed reporting to this article.