Exclusive: CalSTRS Develops Quarantine Plans

The California State Teachers’ Retirement System (CalSTRS) has developed contingency plans in case the investment staff is forced to quarantine because of the coronavirus outbreak.

“If we had to isolate or quarantine all of ourselves, we would be able operate with a skeleton crew and still manage, not just the whole portfolio, but certainly the trading desks,” said Chris Ailman, the system’s chief investment officer.

Ailman made the comments to the CalSTRS investment committee on March 4. The teachers’ defined benefit plan is the second-largest US pension system with around $250 billion in assets.

More than 55% of CalSTRS assets are internally managed by its investment staff.

Ailman, shows a tape of the meeting, said when most people “think of disaster recovery, they think of losing the building,” a reference in CalSTRS’ case to its headquarters building in West Sacramento.

CalSTRS, he said, has an emergency backup location for the investment team to operate, but that the coronavirus is different.

“This is more a case of social distancing that we would all be separated from each other and need to be isolated in our homes,” he said. “Then it really becomes a heavily technology-dependent solution, hopefully with the assumption that if this building had to be quarantined, the servers are still up and running, electrical supplies are up and running, and internet and cell providers are up and running.”

Ailman said investment staffers could work from their homes for a short period, “fairly effectively,” if needed.

But he noted, “Let’s hope we don’t get to that.”

California has had at least 114 residents tested positive for COVID-19, one of the most hard-hit states along with New York and the state of Washington. One of the residents with positive tests is from Sacramento County, where a large portion of the CalSTRS investment staff lives.

Ailman also had some bad news for the investment committee as to the effect of the coronavirus on the system’s investment returns for the 2019-2020 fiscal year. CalSTRS runs on a fiscal year that starts on July 1, and returns through February 28 were 8.2%, the CIO said. Ailman said that by March 3, the overall returns for the fiscal year had dropped to 4.5% because of the (equity) market reaction to the coronavirus.

“So it took about 4% off our total return,” Ailman said.

The CIO did not reveal how much the pension plan had lost in its stock portfolio. It had $126 billion invested as of January 3, CalSTRS statistics show.

Ailman said those details would be provided to the investment committee in closed session.

He did say the pension plan had made money during the coronavirus crisis in its more than $31 billion fixed income portfolio and its approximate $23 billion risk mitigation strategies. He said the specifics would also be discussed in closed session.

CalSTRS has built the risk mitigation strategy over the past several years to counter a prolonged equity downturn. It combines US Treasuries with other complex hedge fund type strategies such as trend-following and alternative risk premia.

Ailman said what will happen investment-wise in the next few months until the end of the June 30 fiscal year is unclear. CalSTRS shoots for a 7% assumed rate of return each fiscal year.

The pension plan is under 70% funded.

“It’s just really tough to forecast at this point how it will play out from an investment staff standpoint,” Ailman said.

He said the pension plan’s risk allocation committee is meeting regularly to see if portfolio adjustments are needed. He said CalSTRS liquidity bucket has been increased but did not offer specifics.

The pension plan had $3.75 billion in liquidity assets as of January 31, CalSTRS financial records show.

Ailman said investment research firms that CalSTRS staff had talked to are assuming “that we might have at least a quarter of no growth or maybe two quarters of no growth in the U.S.A., which is in essence a recession for us.”

Still, the CalSTRS CIO says it’s impossible to determine the future, because we don’t know how big the coronavirus will grow. He said one thing is clear: market swings are likely.

“The market’s going to be probably pretty volatile as it reacts to the news as it comes out,” he said.

Ailman said the ultimate unknown is what happens post-virus, say in the summer of 2020, as to whether the market will resume its bull activity cycle that had been interrupted by the coronavirus.

“The question will be, does the economy restart right where it left off?” he said.