CalSTRS Seeks Risk-Based Allocation Approach, Lower Return Forecast

The $132 billion pension fund’s governing board will discuss implementing a radical new asset allocation that will divvy up the scheme's assets based on their characteristics - like sensitivity to inflation, stable return, or growth - rather than equity or debt.

(November 2, 2010) — The California State Teachers’ Retirement System (CalSTRS), the second-largest US public pension, is exploring a risk-based allocation approach that will divide assets into risk buckets, instead of traditional asset classes.

“The purpose of this Investment Committee project is to look at the portfolio through a different lens, to help quantify and manage risk in a different way,” said a memo to the board written by chief investment officer Chris Ailman. “While this may seem like a simple exercise, it turns the foundation structure of the investment portfolio on its head. We define our world by asset classes; this structure ignores the traditional definition….This new idea for asset allocation is almost radical in today’s setting.”

According to Global Pensions, staff and board members at CalSTRS will consider dividing its $138.6 billion in assets on November 4. If the California pension’s board approves the changes next year, the scheme will have an allocation that mirrors the style of Danish pension fund manager ATP and sovereign wealth fund Alaska Permanent Fund. While ATP divides its assets into an alpha and beta portfolio, the Alaska fund is in the process of implementing a new structure that divides assets into cash, interest rates, company exposure, real assets and special opportunity pools, according to Global Pensions.

In related news, CalSTRS will consider slashing its expected earnings rate on investments to 7.5% as it recovers from market losses. While the assumed rate of return on investments is currently 8%, the lowered return forecast will increase the need for higher contributions.

“The impact of reducing the assumed investment return and assumed inflation rates will result in a better representation of the fiscal condition of CalSTRS benefit programs based on the current economic outlook,” the fund’s actuary Rick Reed said in a report to be presented to the board.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742