CalSTRS boosts alternative targets by $11.5bn

The second largest pension fund in the US has made an ’unprecedented’ move by significantly expanded its target allocations to alternative investments, including private equity and real estate.

The board of the California State Teachers’ Retirement System has agreed to make significant changes to its asset allocation targets as the second largest pension fund in the US moves to what it views as a higher risk, higher return asset mix in order to meet the system’s long-term funding gap of approximately $20 billion (€15.7 billion).

The biggest shift for CalSTRS, which oversees $144 billion in assets, will occur in real estate, where the long-term target will increase from its current mark of 6 percent up to 11 percent. Alternative investments, which include private equity and hedge funds, will move from a 6 percent target to a 9 percent target. Most of the capital flowing to real estate and alternatives will come from the pension fund’s fixed income portfolio, whose target allocation will decline from 26 percent to 20 percent. According to a statement released by CalSTRS, these changes amount to approximately $11.5 billion in additional capital that will flow to real estate and alternatives.

“Strategic asset allocation is the single most important factor in determining our rate of return,” said Christopher Ailman, CalSTRS’ chief investment officer, in a statement. “We’ve been moving incrementally toward more active management over the last few years, but the size of the allocation and the new investment philiosophy guiding the shift are unprecedented in CalSTRS’ history.”

In recent years, real estate and alternatives have been two of the strongest performers for CalSTRS, one of the largest US institutional investors in both asset classes. For the fiscal year ended June 30, 2006, the pension fund generated a return of 13.2 percent, driven by gains of 36 percent and 32 percent in real estate and private equity, respectively. At the end of July, CalSTRS had $10.3 billion in real estate assets and $8.2 in private equity.

The moves to the pension fund’s allocation targets will not “happen overnight,” according to Ailman. It is expected that more detailed plans will be developed shortly with implementation expected to take up to six years.