“The bottom line for us is to be flexible in our management of the portfolio, taking advantage of market opportunities as conditions change,” Ricardo Duran, a CalSTRS spokesperson, told Buyouts.
As part of its 2009 asset/liability study, the pension fund is contemplating the move because market declines have pushed its actual private equity allocation to 14.3 percent as of Dec. 31, 2008, and it expects upcoming capital calls to swell that percentage even further. This is the latest step by CalSTRS to combat the denominator effect. It recently expanded its private equity range to plus or minus six percentage points from plus or minus two percentage points as part of that effort.
The current target of 9 percent was adopted during the 2003 asset/liability study. At that time, CalSTRS expected it would take five or more years to reach that goal. The state’s consultant, Pension Consulting Alliance, is recommending the change, along with an increase in the target to real estate to 15 percent from 11 percent.
Christopher Ailman, the pension fund’s CIO, noted in a board document that, combined with potential investments in infrastructure, the new targets for exposure to private equity and real estate would provide CalSTRS with a possible allocation of 30 percent to illiquid, long-term investments.
“Given the future cash flow and 40-year investment horizon, this level of illiquid investments can be maintained,” wrote Ailman. He added, “If the trust fund grows back toward $200 billion, the investment committee will want to revisit the private equity and real estate limits, as a portfolio of that size may not be able to generate the returns desired by CalSTRS; they simply become too big to invest effectively.” CalSTRS currently has total assets under management of $128.7 billion.