CalSTRS may expand allocation range for alternatives

The $147bn US pension will decide today whether it will respond to the denominator effect by increasing the amount it is allowed to invest in real estate to 17% of total assets.


The California State Teachers' Retirement System has asked its board to increase its acceptable real estate allocation to 17 percent in an effort to counterbalance its over-weighted portfolio.

As of 30 September, 14.4 percent of CalSTRS' investment portfolio was comprised of real estate; its acceptable allocation range for the asset class is between 4 percent and 13 percent with a target of 11 percent.

Under a new allocation policy up for approval today, the $146 billion CalSTRS would be able to invest up to 17 percent of its portfolio in real estate, with a minimum threshold of 5 percent. CalSTRS' long-term target

CalSTRS' similarly over-weighted private equity portfolio would also receive a bump in its allocation range. The pension currently is allowed to invest between 4 percent and 11 percent with a target of 9 percent. At present, 12 percent of CalSTRS' investment portfolio was comprised of private equity. Those limits would be boosted to between 3 percent and 15 percent.

The move is a major shift for CalSTRS and is meant to avoid the automatic portfolio rebalancing triggered when an asset class becomes over-weighted.

The pension has not altered its target allocation range for private equity, real estate and cash since 2001, when it approved a plus or minus two percent range for the three asset classes.

That range is tighter than the average public pension plan, which uses a plus or minus five percent range for all asset classes, according to CalSTRS committee documents.

“Due to the decline in global equity values and, on the other hand, the illiquidity and static value of private equity and real estate the allocation to those areas has well exceeded their policy ranges,” staff wrote in public CalSTRS investment committee documents.  “With the market volatility and lack of liquidity, it is not prudent to be forced into automatic rebalancing.”

In an effort to achieve that kind of flexibility, CalSTRS  will also double its allowance for public asset classes, which have dipped well below their target allocations as a result of the precipitous decline in public markets both in the US and abroad.

Like CalSTRS, institutional investors around the world are confronting over-weighted alternatives allocations, which are restricting their ability to commit to private equity and real estate funds.

Instead of hiking their private equity allocations, many investors have taken to the secondaries market to help alleviate over-weighting problems.

Gary Stevens, partner of Landmark Partners, recently told PERE he had received more phone calls over the past few months from LPs and investors than in the previous three years combined.