CalSTRS to Pursue Microfinance Investments

The second-largest public pension scheme in the US, with $132.5 billion under management, may follow the lead of Dutch funds.

(April 8, 2010) — This week, the California State Teachers’ Retirement System (CalSTRS) will begin exploring microfinance, which they hope will decrease volatility and provide diversification.

“CalSTRS will not only be able to invest in an opportunity that could potentially help meet its financial goal, but also assist economically-active poor demographic located in developing countries,” said the fund in a staff report presented to the Investment Committee today.

CalSTRS is following the lead of Dutch funds like ABP and PGGM that have funneled assets to microfinance investment vehicles. In recent news, ABP, a Netherlands-based pension fund, announced that it has committed $30 million to Grassroots Capital’s Global Microfinance Equity Fund (GMEF).

“In much of the developing world, financial services need to be made available and improved in order to enable the economically poor to keep pace with economic growth,” the report on CalSTRS’ Web site said. While microfinance loans are estimated to reach $300 billion, supply is at only $38 billion.

The California pension fund can get exposure to microfinance via a direct investment in a microfinance institution (MFI), private equity investment in a microfinance institution, public equities or bonds, and specialized microfinance investment vehicle, Global Pensions reported.

The pension scheme, which suffered a 25% drop in the value in its investments last year and is now faced with a soaring deficit, said that microfinance represents new opportunities and challenges for institutional investors. The fund outlined a number of concerns for investors considering an allocation to the asset class: 1) size of investment, 2) transparency, 3) limited track record, as few fund managers have significant experience in microfinance portfolio management during a downturn, and 4) risk from emerging markets, where a significant amount of microfinance activity takes place.

Separately, the fund is looking to hire a hedge fund consultant to assist the system in selecting, monitoring and assessing an expected $200 million in global macro strategies, Business Wire reported. CalSTRS staff will work with the consultant to select three to six hedge fund managers. According to data provider Hedge Fund Research, global macro funds lost an average of 1.72% in the first quarter.

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