CalSTRS' PE portfolio lags key indices

One of the biggest pensions in the US may be a bit disappointed with its private equity programme.

The $134 billion California State Teachers’ Retirement System has seen its programme underperform certain benchmarks due to huge exposure to buyouts and the general state of the economy.

In a frank assessment of the private equity programme, with a total value of $38 billion, Mike Moy of Pension Consulting Alliance said “performance metrics for the private equity asset class present a mixed picture. Over certain periods of time the programme is outperforming certain benchmarks but over certain other time periods (generally shorter-term) and/or in comparison to other benchmarks, it is not.”

“This will no doubt be disappointing to the investment committee (as it is to staff) as this programme has long been accustomed to unequivocal outperformance over most (if not all) time periods and benchmarks,” Moy said in the written assessment included in board material for the meeting Wednesday.

Over certain periods of time the programme is outperforming certain benchmarks but over certain other time periods (generally shorter-term) and/or in comparison to other benchmarks, it is not. Mike Moy

An “overweight” exposure to the buyout sector and the lagging characteristics of private equity valuations were the primary reasons Moy cited for the “diminished outperformance”. 

Moy does point out that the jury is still out on how more recent funds will perform. “This asset class focuses on long-term value creation. Shorter term results should therefore be considered cautiously,” he said.

CalSTRS private equity portfolio has lagged its custom benchmark over the latest one-year and three-year periods. CalSTRS custom benchmark is the return of the Russell 3000 Index plus 300 basis points. The programme underperformed the State Street Private Equity Fund Index over the latest three-year, five-year and ten-year periods, but outperformed the index over the latest one-year period.

Buyouts represent 70 percent of the private equity portfolio’s value as of 31 March, 2010, according to Moy. Distressed debt represents 15 percent of the value and the remaining portfolio sectors include venture capital, expansion capital and mezzanine.

CalSTRS has made 295 commitments and co-investments since 1988 for a total of about $39 billion committed. Of that, $28 billion has been called and $19 billion distributed. The programme, since inception, has generated an internal rate of return of 13.6 percent. The private equity programme is headed by Margot Wirth, and the pension's investment division is led by Christopher Ailman.

The pension has taken proactive measures to manage the portfolio, cutting out managers that are underperforming and keeping its eyes open for “new and potentially less traditional” opportunities.