CalSTRS pushes for more diversity in its investment portfolio

  • CalSTRS is updating its diversity policies
  • The new approach will go beyond asking about diversity at the leadership level
  • Fund-of-funds play an important role in bringing new managers to CalSTRS

California State Teachers’ Retirement System wants to see diversity throughout an investment firm, not just among ownership, according to its CIO.

CalSTRS prides itself on its pursuit of diversity, but its old policies need to be updated to account for broadening definitions that now commonly include groups like Pacific Islanders and sexual orientation groups, CIO Chris Ailman said at the retirement plan’s November meeting.

CalSTRS also wants to place a stronger emphasis on inclusion, asking about diversity within an investment manager’s staff. This is to ensure that diverse individuals retain real decision-making power within an organization, Ailman said.

“The focus is only on one person at the top, which in our view doesn’t cut it,” Ailman said.

The $229 billion retirement plan invited 150 emerging managers to a reception after its Nov. 7 investment committee meeting and hosted a panel discussion on its diversity efforts, featuring speakers from Artemis Real Estate Partners, Goldman Sachs Asset Management, HarbourVest Partners and Progress Investment Management Company.

The discussions are meant to get input from experts and the board as CalSTRS re-writes its long-term strategic plan for encouraging diversity within its investment managers.

CalSTRS is limited by a California law that prohibits investment decisions based on race or gender. CalSTRS’s investment programs don’t explicitly mandate diversity, unlike similar programs in Illinois and New York, but instead pursues diversity through its emerging managers programs, where diverse firms are more prevalent. The system relies on funds-of-funds to accomplish that goal.

“It’s easier for us to get that information through our funds-of-funds, because they have the ability to ask more pointed questions,” Ailman said.

In private equity, CalSTRS has sought exposure to emerging managers through feeder programs, managed by Invesco and Harbourvest, and a fund-of-funds managed by Muller & Munroe Asset Management. Those investments capture data on diversity within the ownership and senior partnership of emerging managers, but could go deeper, according Ailman.

As of January 2018, Invesco had committed $381.2 million, or 60 percent of the total CalSTRS capital commitments, into groups that represent diversity in the senior partnership team, and will pursue through an additional $250 million commitment made in 2017, according to CalSTRS’ annual report on its diversity goals.

The HarbourVest program, focused on private equity funds specializing in inner U.S. cities and underserved markets, has invested $585 million in 55 funds and $489 million in 44 diverse-led funds, according to CalSTRS.

CalSTRS has also invested in Muller & Monroe’s commingled fund, which focuses on emerging and niche lower middle market firms, and that fund has invested $124 million in 11 funds where 50 percent of the fund managers have partners that are women or ethnically diverse.

Diverse teams are becoming easier to find within private equity firms, and private equity firms that include women and minorities among their key decision-makers have performed well, making the investment case easier to make, according to Ed Powers, a managing partner at HarbourVest.

“We see these firms growing up and becoming a core part of your private equity program, and that’s a true success,” Powers said.


Thurman White, chairman and CEO of Progress Investment Management Company, noted New York State Common Retirement Fund had been a leader in graduating new managers from a fund-of-funds directly into the system’s investment portfolio.

In private equity, investors’ emphasis on past performance makes it challenging for new firms to break through, Powers said. And since strategies are illiquid, it can be difficult to quickly assess performance. CalSTRS has had trouble deciding when to “get off the bus” if an emerging manager’s performance suffers, Powers said.

“That’s a very difficult decision to make, because it takes so long in this industry to tell if something is working,” Powers said. “But the rotation out of the managers who aren’t performing is what makes space for new managers.”

Action Item: Check out CalSTRS agenda item for its diversity discussion here