CalSTRS officials announced the plan in mid-July to
shuffle part of their asset allocation, saying the
shift could take about six years (See
CalSTRS Plans Shift to Alternative
).The system, which has about $144 billion in its
portfolio, will shift 6% of its assets out of fixed income
and 1% each from cash and US equities. Real estate funds
will see the greatest swell, with a 5% increase, and
alternative investments will increase by 3%.
According to the a news release, the board’s decision came after a six-month asset and liability study that weighed the cost to administer the system and the funded status of the system over a 30-year period.
“Strategic asset allocation is the single most important factor in determining our rate of return,” said Christopher Ailman, CalSTRS chief investment officer, in a news release. “We’ve been moving incrementally toward more active management over the last few years, but the size of the allocation and the new investment philosophy guiding the shift are unprecedented in CalSTRS’ history.”
In an effort to boost returns, once-reluctant pension funds have been slowly shifting some of their assets in the past few years out of fixed income and into alternative investments such as real estate and private equity – instruments they mostly steered away from because they deemed the risk too great (See Running the Fund: Spreading Their Wings ).
CalSTRS in particular may have been encouraged by the returns other public funds have been reaching by putting more of their assets into real estate funds. The California Public Employees’ Retirement System’s (CalPERS) real estate portfolio, accounting for 6% of the plan’s $190 billion asset total, returned 38% for the year ended June 2005. The Missouri State Employees’ Retirement System earned 31.5% on $300 million of real estate assets, equal to about 5% of its $6.5 billion portfolio (See Head of the Class: “Up on the Roof” )
The same can be said for pension plans’ interest in private equities, with CalPERS iinvesting about 5% of its total assets in 2005 to earn 22.8% (See Head of the Class: The New Barbarians ).