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CalSTRS approves $1bn infrastructure policy

The US’ second largest pension fund has allocated $1bn to the growing asset class with California’s infrastructure needs to be given preference. The pension also announced its prediction that private equity will reach 15 percent of total assets by 2012.

 

The California State Teachers’ Retirement System (CalSTRS) has approved a policy that will allocate $1 billion (€642 million) to infrastructure.

The US’ second largest public pension fund said it would consider investments in the growing asset class as part of a new fixed assets financing programme.

The $176 billion fund’s next step in enacting the policy is the development of an implementation plan which could be presented to the investment committee as early as the beginning of September, a spokeswoman told PEO. A manager search will be launched in approximately six months, following the implementation plan’s approval, she added.

The programme may not make its first investment for as long as two years though, but investments in energy, transportation, ports, water, communications, healthcare and judicial buildings will be actively considered. Prisons, schools, airports and other “large employment base infrastructure” investments will not be allowed. A provisional policy paper had called for such infrastructure investments to be judged on a case by case basis, however a blanket ban was approved at a CalSTRS board meeting yesterday.

The US would be a significant beneficiary of the new allocation pot as an emerging infrastructure market, the policy document went on to say, with Californian projects set to be given preferential treatment. “Investment in California must have the same market risk and return as any other similar fixed asset financing investment,” it said.

The initial allocation of $1 billion would be invested over time, CalSTRS said, with up to 70 percent of the pot going to core investments such as energy, utilities and transportation; up to 50 percent to value-added investments and up to 30 percent in publicly-traded infrastructure equities.

The pension fund said it expects to reap returns of at least 5 percent net of fees for core investments and a minimum of 7 percent net of fees for value-added projects. At least three-quarters of all investments would be focused on the US, with investments in closed-ended commingled vehicles limited to 10 years.

CalSTRS also approved the lowering of the benchmark for its alternative investments portfolio. The benchmark has been adjusted from the Russell 3000 Index plus 5 percent to the Russell 3000 Index plus 3 percent.

Also approved was the 2008-2009 business plan for alternative assets. “The private equity asset class in the United States and Europe is now experiencing a correction period due to the changing capital markets,” states the plan.

CalSTRS has increased its allocation to distressed debt from 3.3 percent to 8.6 percent calling the asset class “counter cyclical” to private equity.

Private equity currently makes up 10 percent of total CalSTRS asset, in excess of the 9 percent allocation. The asset class is projected to reach 15 percent of total assets, or $34 billion, by 2012.