CalSTRS reports 12.4% real estate loss

The California State Teachers’ Retirement System lost 12.4 percent on its real estate investments over the past year – but will temporarily increase its allocation to the asset class to take advantage of distress in the market.

The $132.2 billion public pension reported overalls gains for the fiscal year 2009-2010 of 12.3 percent, with every asset class besides real estate posting positive performance.

Real estate continued to lag against other asset classs, but performed much better for CalSTRS than for neighbouring pension CalPERS (the California Public Employees Retirement System), which reported losses of 37.1 percent in the year to the end of March.

The American economy suffered a near-death experience in 2008, and it’s going to take some time to fully recuperate from that. This year’s performance is a solid start along that road to recovery. CalSTRS chief investment officer Christopher Ailman

CalSTRS had an actual allocation to real estate of 10.1 percent as of the end of June, against a long-term target allocation of 15 percent.

During the same period, CalSTRS reported gains of 21.7 percent for private equity; 14.5 percent for global equities; and 12.3 percent for fixed income. The pension had an actual allocation to private equity of 14.5 percent; 51.7 percent to equities and 22 percent to fixed income.

In a statement, chief investment officer Christopher Ailman said the pension was “not out of the woods yet”, adding: “The American economy suffered a near-death experience in 2008, and it’s going to take some time to fully recuperate from that. This year’s performance is a solid start along that road to recovery.”

As a result, investment staff have temporarily shifted 5 percent of CalSTRS' portfolio from global equities to real estate, private equity and fixed income “to take advantage of the distressed market”, as well as create a 5 percent allocation to a new inflation-protection absolute return asset class, offset by a permanent 5 percent reduction in equities.

The pension, however, has also noted the lack of real estate and infrastructure deals saying in July investment committee notes that it would slow the pace of increase in relation to its exposure of the two asset classes.

Earlier this month, PERE reported that CalSTRS was looking to invest more of its real estate capital in core real estate managers in the coming year, increasing its allocation to core funds by some 15 percent. The pension will allocate 50 percent of its real estate allocation to core strategies, with value-added and opportunistic strategies set to account for 20 percent and 30 percent, respectively, over the next three to five years.

CalSTRS has traditionally allocated its real estate investments according to core and tactical strategies, with core accounting for roughly 35 percent of the real estate portfolio and tactical (value-added and opportunistic) accounting for around 65 percent of the asset class, as of the end of September 2009.