CalSTRS Mulls Over Opportunistic Portfolio and Leverage

Arleen Jacobius of Pensions & Investments reports CalSTRS weighs adding opportunistic investments to counter rates:

CalSTRS is considering adding an opportunistic asset class as well as leverage to certain asset classes to counter lower anticipated returns, resulting from a low interest rate environment over the next 10 years.

Christopher Ailman, CIO of the $257.9 billion California State Teachers' Retirement System, West Sacramento, raised both ideas as strategies the board might consider at Wednesday's investment committee meeting.

"Target returns will be harder to achieve," Mr. Ailman said, referring to a Meketa working paper on the low interest rate environment, shared by Allan Emkin, managing principal of CalSTRS' investment consultant Meketa.

Mr. Ailman said his takeaway was that investors need to be both agile and stay the course. He said he was proposing the board look at a new opportunistic asset class of 5% to 10% to allow CalSTRS to be nimble.

But Mr. Ailman cautioned that an opportunistic portfolio is a challenge because it can both add and cost returns. Also, he said that he is not advocating for additional investment discretion.

As for leverage, Mr. Ailman said that he did not think that leveraging the entire plan is a good strategy for CalSTRS. However, he did think that if the fund might be able to take advantage of the low interest rate environment by borrowing on a portfolio level in real estate, infrastructure and possibly private debt.

But he said that CalSTRS would have to focus on using leverage, which it would borrow directly from financial institutions "opportunistically and cautiously."

Preeti Singh of the Wall Street Journal also reported on how CalSTRS is looking at its past in the search for flexibility:

The California State Teachers’ Retirement System’s chief investment officer is looking to the pension’s past to respond more nimbly to future shifts in the market.

At a recent pension board meeting, CIO Christopher Ailman urged Calstrs’s board to consider enhancing its ability to make opportunistic investments, better enabling it to take advantage of investments that don’t fit neatly into other asset categories. 

You can read the entire article here (subscription needed). 

So, what do I think of CalSTRS's opportunistic portfolio? I think Chris Ailman is right to try it but he's also setting the expectations right when he cautioned it can both add and cost returns.

In other words, there's no free lunch, especially when you're the second largest public pension fund in the United States.

Just like CalPERS, CalSTRS is underfunded (I believe both are 69% funded but it's probably worse now that rates dropped) and struggling to generate the required yield given record low rates.

An opportunistic asset class of 5% to 10% sounds cool in theory but in practice, it can lead to pack of governance issues.

Who will be in charge of it? The CIO or a committee? When things are going right, everyone wants to own success, but if things start faltering, you need accountability to see what went wrong and who is responsible for these decisions.

Also, how will they determine if it's opportunistic or should be placed in the Real Estate, Infrastructure or Private Equity bucket? Again, there are opportunistic buckets and Blackstone's Tac Opps group is a perfect example of what success looks like. Not sure many pensions can emulate this success in-house. 

And most importantly, just how scalable is this opportunistic portfolio to move the needle materially for CalSTRS? If it's not scalable, don't bother doing it, it won't make a material difference.

As far as leverage, it sounds like Chris Ailman is going to proceed very cautiously there too.

Leverage is a key element behind the success of Canada's large pensions (plan design and governance are the real keys to success which allow for the use of leverage).

In order to use leverage wisely,  whether its balance sheet leverage, LDI, derivatives or whatever, you need to hire very competent people who know what they're doing because leverage is also a double-edged sword which can magnify gains and losses.

But just like CalPERS, I think it makes a lot of sense for CalSTRS to use leverage in order to avoid a 2008 scenario where they get caught without sufficient liquidity to meet their capital calls from private equity partners and are then forced to sell stocks at the wrong time.

Again, Chris Ailman knows all this, he's a seasoned CIO who typically makes very sensible recommendations.

And he has a great team backing him up.

In fact, before I forget, I'd like to congratulate April Wilcox who was recently appointed the new director of investment services at CalSTRS:

The California State Teachers’ Retirement System today announced the appointment of April Wilcox as the new director of investment services. Wilcox will oversee the business support units of the Investments Branch, including operations, performance, compliance and administration. The position reports directly to Chief Investment Officer Christopher J. Ailman.

Wilcox advanced to this position after spending five years as investment operations director where she managed middle-office trade management functions and operational risk.

“We conducted an extensive search with strong candidates both internally and externally,” Ailman said. “April has risen through the ranks in the Investments Branch at CalSTRS over the last 15 years and is an industry leader in investment operations.”

Wilcox has more than 20 years of investment experience across front, middle and back offices including investment operations and investment accounting. Prior to managing Investment Operations, Wilcox spent five years in CalSTRS’ Fixed Income unit, overseeing the Opportunistic Portfolio and external manager program. Wilcox joined CalSTRS in 2004 from the California Housing Finance Agency as an accountant.

“April’s deep breadth of knowledge and leadership skills will help drive success throughout the Investments Branch,” said Scott Chan, CalSTRS Deputy Chief Investment Officer.

Wilcox leads the Pension Peers Investment Operations Forum and is a member of both the State Street Client Advisory Council and the Investment Management Alliance at Cutter Associates. She also volunteers and advocates for Junior Achievement of Sacramento, a nonprofit organization dedicated to fostering work-readiness, entrepreneurship and financial literacy skills for young people.

“I am thrilled to continue my journey and growth at CalSTRS,” Wilcox said. “We have a great team and strong culture that I am fortunate to be a part of.”

Wilcox has a Bachelor of Science degree in finance from California State University, Sacramento, holds the Chartered Alternative Investment Analyst (CAIA) designation and was awarded the Investment Foundations Certificate by CFA Institute. Wilcox’s position replaces former Chief Operating Investment Officer Debra Smith.

About CalSTRS

CalSTRS provides a secure retirement to more than 964,000 members whose CalSTRS-covered service is not eligible for Social Security participation. Members retire on average after more than 24 years in the classroom with a monthly benefit of approximately $4,547. Established in 1913, CalSTRS is the largest educator-only pension fund in the world with approximately $257.9 billion in assets under management as of September 30, 2020. CalSTRS demonstrates its strong commitment to long-term corporate sustainability principles in its annual Global Reporting Initiative Sustainability Report. For more information, visit

Good for her, she has big responsibilities there and she definitely has the experience and knowledge to carry them out.

I should also congratulate Kirsty Jenkinson, their Sustainable Investment and Stewardship Strategies (SISS) Investment Director, who back in July was selected as one of Chief Investment Officer Magazine’s Class of 2020 NextGen investors.

Jenkinson leads a portfolio of $6.3 billion and is also responsible for overseeing CalSTRS’ stewardship activities, including the system’s corporate engagement and proxy voting activities, and managing strategic relationships with key stakeholders, the media and the broader investment industry. You can read more about her here

Like I said, Chris Ailman has a solid team backing him up and that will come in handy as they set up this new opportunistic portfolio.

It's not going to be easy but in an ultra-low rate environment, they need to capture all alpha, including opportunistic alpha.

Below, the latest CalSTRS board meeting which took place last Wednesday. Fast forward to the CIO's Report which begins in the second hour (2:32). Chris Ailman goes over the new opportunistic asset class at minute 2:42 and he admits CalSTRS did this in the past and it flopped so he is going to proceed very cautiously with any discretionary portfolio. Smart man, he knows what he's doing.

Last week, Ailman also did an an interview on “Bloomberg Markets: The Close,” and said the current environment in China makes it hard for an investor to stay there long term. Listen to his comments below.