CalSTRS vs. CalPERS: Divergent strategies
On September 2, the California State Teachers’ Retirement System (CalSTRS), the second largest public pension fund in the United States, announced that it would consider shifting as much as 12 percent towards treasuries, hedge funds, and other complex investments. A final decision will not be made until November.
Treasuries and hedge funds are, in theory, more safe equities when markets are in a downturn. United States treasury bonds are backed by the federal government and still considered the safest investment in the world. Hedge funds use complex strategies to help prevent against significant losses when markets take a down turn. However, the hedge fund asset class can be difficult to understand. Every fund has a different risk profile depending on its size in terms of AUM (assets under management), overall trading strategy, and the current macroeconomic conditions. It is also difficult to accurately track the performance of the hedge fund universe, as funds are constantly opening and closing.
CalSTRS manages approximately $191 billion. The pension plan currently holds (all numbers approximate) 57 percent of its assets in global equity, 16 percent in fixed income, 12 percent in private equity, 12 percent in real estate, and 3 percent in cash. A reduction in global equities of $20 billion would have a significant impact on the funds long term performance and on the future incomes of many Californians.
The announcement comes during a period of significant market volatility. Emerging markets have been losing money all year. The European economy has seen little growth in 2015 and has been faced with multiple crisis including: the Greek bailout, continued tensions in the Ukraine, and an influx of immigrants from the Middle East. China is still trying to figure out the best strategy to stop the bleeding from the Shanghai Stock Exchange Crash in June and July. The ensuing devaluation of the Chinese Yuan was unexpected and sent major shock waves throughout the global economy.
The potential shift towards hedge funds is interesting considering last year’s strategic decision to abandon hedge funds by the largest public pension fund in the United States. In September 2014, the California Public Employees’ Retirement System (CalPERS) made the decision to reallocate $4 billion of its investments away from hedge funds.
The pension fund cited a combination of high management fees and not enough return on investment as the reason for leaving hedge funds behind. CalPERS holds total assets of approximately $300 billion and generated only a 2.4 percent return on investment for the 12 month period ending June 30 of this year. However, the fund has generated a stronger 10.9 percent return over the last three years.
CalSTRS’s final decision will hinge on the macroeconomic events of the upcoming months. China’s ability to stabilize its stock market and the Federal Reserve’s decision on when to raise rates will significantly impact the pension fund’s choice.
Will CalSTRS decide to change their investment strategy? Will the move pay off in the long run for the teachers relying on the pension fund? Feel free to leave a comment or find me on Twitter” @Andrew_Morse4