With 6.8% Return, CalSTRS Narrowly Misses Target

Private equity is bright spot as market volatility impacts annual returns.

Despite a pendulum market and soaring volatility metrics in late 2018 and spring 2019, the California State Teachers’ Retirement System (CalSTRS) pulled close to its target 7% annual return, clocking in a 6.8% net return at the end of the 12-month period ending June 30.

The nation’s second-largest public pension plan also recorded its highest-ever fund value at $236.9 billion. Previous years recorded valuations of $223.8 billion (2018), $208.7 billion (2017), and $188.7 billion (2016). The pension is approximately 64% funded, and is on a quest to achieve 100% by 2046.

“There was great volatility in the market at the beginning of 2019, and in the spring. Given the timing of our fiscal year, the downturn in May made it difficult to achieve our assumed rate of return,” a CalSTRS spokeswoman told CIO.

Private equity generated the highest returns for the portfolio, generating a 10.5% net return in the fiscal year. It was closely followed by “innovative strategies” (9.2%), risk mitigating strategies (8.3%), and real estate (8.2%).

Source: CalSTRS

“It was a roller coaster year and a very challenging environment in which to generate returns,” said CalSTRS Chief Investment Officer Christopher Ailman. He recently noted that amongst his top concerns in the market is President Trump’s behavior on Twitter, alongside Iranian aggression and Brexit.

The pension’s 2018 calendar year returns fell into negative territory, generating -3.2% in returns during the time period. The S&P 500 stock index returned -4.38% in calendar year 2018 and many retirement plans, like CalSTRS, have around 50% or more of their asset allocation devoted to equities.

The California State Public Employees’ Retirement System(CalPERS) generated a similar preliminary net return in the 12-month period ending June 30. Chief Investment Officer Ben Meng attributed the slight underperformance to its target to a “very volatile year for financial markets” as well. CalPERS’s highest performing asset classes were fixed income (9.6%), private equity (7.7%), and public equity (6.1%).

CalSTRS is looking to bolster its returns and lower investment costs through the “Collaborative Model,” a strategy that leverages in-house investment expertise rather than relying solely on outside managers to generate alpha.

“Diversity in the management of investments is interwoven throughout our business goals and is consistent with the objective to invest in strategies that enhance returns at a prudent level of risk,” the CalSTRS spokeswoman told CIO.

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CalSTRS Stresses the ‘Importance of Acting Quickly’ to Maintain Funding Progress

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