CalSTRS revises infrastructure policy

The $140bn California pension presented its investment committee with a new policy that gives greater preference to private investments and emphasises OECD markets. Director of Investment Management John Petzold said the policies will give CalSTRS ‘a more clear and focused way’ to invest in the asset class.

The California State Teachers Retirement System (CalSTRS) is revising its infrastructure policy to provide more detailed guidelines on how the $140 billion pension should invest in the asset class.

“The policy needed to be updated so that it would at least provide us with a more clear and focused way to manage the investment strategy,” John Petzold, director of investment management at CalSTRS, told the pension’s investment committee during a webcast of a meeting Thursday.

John Petzold

Among the updates are more finely delineated target allocations for various investment strategies and geographies, according to a policy document presented to the committee.

“These updates that we have in the policy are consistent with a diversified portfolio and will allow us to better monitor the portfolio,” Petzold added.

CalSTRS’ new policy allocates more capital to private infrastructure versus publicly-listed infrastructure equities. Previously, up to 70 percent of the portfolio could be private, with the remaining 30 percent in public equities. Now, the private infrastructure allocation could go as high as 80 percent, and public equities only up to 20 percent.

The change was made to “limit the program’s exposure to market risks”, according to the policy document.

The private infrastructure portfolio is also more finely delineated in the new investment policy. Previously, CalSTRS allocated only to two strategies – “core infrastructure” and higher-return “value added” investments . In the new policy, the “value added” investments are further separated into “value added” and “opportunistic” investments.

The policy needed to be updated so that it would at least provide us with a clear and focused way to manage the investment strategy

John Petzold

The change was made to “provide a clearer distinction between the risks and rewards” and to “allow staff the ability to better track investment opportunities”.

The new policy also outlines more detail around the geographies the pension will target in its investment portfolio. Investments in the US and Canada will constitute no less than 20 percent of the portfolio and no more than 70 percent.

Investments in other developed markets, such as those that belong to the Organisation for Economic Cooperation and Development (OECD), will account for between 10 percent and 50 percent. Non-OECD countries have a target of between zero and 20 percent.

CalSTRS purposely weighted the allocations toward OECD members “to reduce risk”.

A redlined version of all the changes to the previous policy, last approved by the investment committee in July 2008, is available on the CalSTRS website. The investment committee is scheduled to vote on the new policies in April.

By that time, the committee may also be asked to approve some infrastructure investments. A memo accompanying the policy document stated that, as of the beginning of 2011,  CalSTRS “has several transactions in the pipeline and a few under actual due diligence”. If they pass a review by CalSTRS staff and its consultants, they will be brought to the investment committee “at a Spring meeting”.

CalSTRS has a 5 percent allocation to an absolute return asset class, which includes infrastructure. Infrastructure is targeted to fill half the absolute return asset class’ allocation, but the pension is yet to make any investments.

Last year, CalSTRS appointed a portfolio manager for infrastructure, Diloshini Seneviratne, and promoted Petzold to oversee the absolute return asset class as part of his duties as director of investment management.

Alexandra Atiya contributed reporting to this article