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CalSTRS ups RE allocation to 10%

Following close on the heels of CalPERS’ portfolio allocation changes, the $173bn California State Teacher’s Retirement System has increased its real estate target to 10 percent and its private equity allocation to 8 percent.

Real estate is taking up a bigger portion of CalSTRS’ $173 billion portfolio. The California pension fund recently announced its decision to raise its real estate allocation to 10 percent, from its prior target of 9 percent, along with an increase in its private equity target of one percentage point to 8 percent. The announcement comes two months after the $250 billion California Public Employees’ Retirement System’s decision to increase both its real estate allocation and private equity allocations to 10 percent each.

With its portfolio adjustments, CalSTRS cut its allocation to US equity and fixed income to 41 percent and 20 percent, respectively, with international equity remaining unchanged at 21 percent.

The changes are in line with the pension fund’s long-term target for real estate of 11 percent and private equity of 9 percent. To manage the shift to the new allocation targets established by CalSTRS’ investment committee, the pension is taking what it calls a “step approach” with step-by-step increments in its target for real estate and alternative investments. The pension’s 7 percent allocation to real estate in fiscal year 2006 had successive step-ups to 8, 9 and its current 10 percent, a percentage point away from its long-term target. Likewise, its alternative investments, which started at 6 percent in fiscal year 2006, increased to 7 percent and most recently to 8 percent of its total portfolio.

The incremental changes represent a gradual ascension toward the pension fund’s long-term targets for both real estate and private equity. “We’re not target chasers,” CalSTRS’ alternatives head Réal Desrochers recently told sister publication Private Equity International. “We try to be good investors.”

Last month, the California pension entered into a $200 million joint venture with Sealy and Company to invest in industrial projects in the US. As part of the arrangement, Principal Real Estate Investors, the property investment arm of Principal Financial Group, will identify opportunities for the joint venture. CalSTRS also recently made commitments to two separate funds managed by Chicago-based REIT First Industrial. It committed an initial $150 million to a European JV targeting the Netherlands and Belgium and an initial $90 million to a Canadian JV.