CalSTRS Takes a Look at Other Allocation Options

Pension identifies six potential asset allocations for $236.9 billion portfolio.

After clocking in a 6.8% return in its most recent fiscal year, the California State Teachers’ Retirement System (CalSTRS) took part in its once-every-four-years asset allocation study to identify opportunities for better returns and lower risk levels.

The current asset allocation policy, which seeks to achieve a 100% funded ratio by 2046, mostly through investment returns (61%), employer contributions (18%), state contributions (11%), and member contributions (10%), was put against five other potential asset allocations for the $236.9 billion portfolio.

The candidate portfolios being evaluated are illustrated here:

Source: CalSTRS

The current allocation is the second from the right, denoted with a 7.2% long-term expected return net of expenses. The encircled bar represents CalSTRS’ current long-term asset allocation policy portfolio.

Metrics for each hypothetical scenario, including potential returns, and their respective risk of failing to meet 100% funding by 2046, are illustrated here:

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Source: CalSTRS

“The principle of a risk-return tradeoff for portfolio returns also extends to liability metrics,” CalSTRS’s investment committee said in a statement. “Achieving a higher chance of reaching full funding by 2046 involves higher portfolio risk and a higher chance of a low funding level before 2046 due to the increased investment volatility.”

Another element CalSTRS is considering in risk to rewards trade-offs are the influence of each strategy’s return profile, and the subsequent potential increases in contribution rates to make up for any potential shortfalls. Each portfolio’s chances of influencing contribution rates, for better or for worse, are shown here:

Source: CalSTRS

CalSTRS and its investment consultant, Meketa, are going to consider further refined potential portfolio allocations in September, and approve their favorite in November 2019. Subsequently the investment committee will adopt a long-term asset allocation in February 2020.

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