Alternative assets boost CalSTRS returns

Alternative assets returned 27.6 percent to CalSTRS last fiscal year. Though less than last year’s 32 percent return, CalSTRS’ alternative assets outperformed the portfolio as a whole by around 7 percentage points.

The California State Teachers’ Retirement System’s alternative assets portfolio returned 27.6 percent for the 2006-2007 fiscal year – beating the overall portfolio’s 21 percent return, but failing to match last year’s 32 percent return for the pension’s private equity and hedge fund investments.

While alternative assets outperformed CalSTRS’ overall portfolio, as well as the individual returns for US stocks and fixed income portfolios, real estate and international stocks provided higher returns for the pension fund. Real estate investments had a 32.9 percent return, while international stocks returned 30.2 percent, US stocks returned 20.9 percent and fixed income returned 6.5 percent.

Overall, its returns added $26 billion to the US’ second largest pension fund, bringing its capital under management to $170.4 billion (€123.3 billion). This is CalSTRS’ fourth straight year of double-digit returns; last year it achieved a 13.2 percent return on investments.

“By any measure, this will go down as one of our most spectacular years,” Christopher Ailman, CalSTRS’ chief investment officer, said in a statement. “We played it smart when the opportunities arose and it demonstrates a consistent flow of great investment decisions over the last five years.”

CalSTRS ended last fiscal year with 7 percent of its portfolio, or approximately $12 billion (€8.7 billion), invested in alternative assets, up from 6 percent in 2005-2006. It allocated 41 percent of its portfolio to US stocks, down from 42 percent in June 2006; 21 percent toward international stocks, down from 22.3 percent the previous year; 21 percent to fixed income, down from 22.1 percent; and 1 percent toward cash, up from 0.2 percent. The biggest allocation shift occurred in the real estate portfolio, which rose from 7.4 percent of CalSTRS’ portfolio in June 2006 to 10 percent in June 2007.
 
Last September, the fund significantly expanded its target allocations to alternative investments. The pension fund moved to what it views as a higher risk, higher return asset mix in order to meet its long-term funding gap of about $20 million. Its alternative investments target, including private equity and hedge funds, increased from six percent to nine percent.

CalSTRS is already a major investor in private equity. In 2005-2006, among the nearly 100 private equity firms in CalSTRS’ portfolio were Apax Partners, Bain Capital, The Blackstone Group, The Carlyle Group, Centerbridge Capital, Cerberus, CVC Capital Partners, Hellman & Friedman Capital Partners, Kohlberg Kravis Roberts, Madison Dearborn Partners, Oaktree Capital Management, Onex, Permira, Providence Equity Partners, Texas Pacific Group, THL Equity Advisors, and Warburg Pincus.        

Following the 30 June expiration of CalSTRS’ contract with McKinsey, the pension fund hired Pension Consulting Alliance as an alternative investment consultant.