CalSTRS’ infra-heavy portfolio underperforms

The $209bn pension fund said short-term returns are not ‘particularly significant’ for the assets and expects greater cash flow over the long term.

The California State Teachers’ Retirement System reported the portfolio housing infrastructure investments underperformed for the fiscal year ending 30 June but said the asset class is expected to pay off over the long term.

CalSTRS noted its Inflation Sensitive Portfolio, which represents 1 percent of the $208.7 billion pension system’s total fund, generated 4.2 percent return net of fees. Its benchmark was 4.45 percent.

The $1.9 billion Inflation Sensitive Portfolio consists of 70 percent infrastructure investments, which generated a 4.93 percent return, the rest being accounted for by Global Inflation Securities, returning 2.56 percent. Despite stating the portfolio has underperformed its benchmark by 128 basis points over the three previous years, CalSTRS said it plans to increase inflation-sensitive investments to 4 percent of its total fund.

CalSTRS explained in its annual report that short-term results for infrastructure investments are not “particularly significant,” adding that it believes the asset class has “begun to enter a more mature phase and is beginning to achieve greater cash-flow potential”.

Infrastructure currently has $778 million of unfunded commitments, compared with $8.6 billion for real estate and $9.9 billion for private equity.

Returns for both asset classes beat benchmark expectations this year. Real estate returned 8.1 percent, beating its 7.4 percent benchmark, and private equity returned 17.2 percent, well over its 12.6 percent benchmark.

“Just as one bad year will not break us, one good year won’t make us. We intentionally keep our eyes focused on a 30-year horizon and make our adjustments with that timeframe in mind, rather than reactively responding to any given situation at hand,” said Christopher Allman, CalSTRS chief investment officer.

Last November, CalSTRS disclosed its manager fees by asset class for the first time, reporting it spent $11.5 million for infrastructure investments.