The California State Teachers’ Retirement System (CalSTRS) will publish its business plans in the next week or so, and with a back-to-basics theme, the investment team has been directed to review its mix of active versus passive. Chief investment of CalSTRS, Chris Ailman, says the board typically asks the investment team to review three broad themes in addition to its normal portfolio level and work. “The board wants us to look at the mix of active passive in both equities and fixed interest investments. We have traditionally been heavily passive and that has helped us. Active management has been very expensive, at times it has proved its worth, at other times it hasn’t,” he says.

“This is going to be a very open and honest dialogue and an interesting debate.” The debate will centre around whether to increase or decrease active management and to change the fund’s policies around that. About one third of all CalSTRS investments are internally managed, with about 80 per cent of fixed income and 35 per cent of US equities managed inhouse. With three retirements this year the fund is currently recruiting for a new director of private equity, and director of global equities, with announcements due in the next month or so. Ailman believes the fund could run more assets inhouse, at a fraction of the cost, but is cognisant of the limits of being a large public pension plan.

“If you are going to be an investment management company we need to consider that we are inside the structure of a governmental identity, which is subject to Governor orders and three-day furloughs, and that’s probably not the way you would choose to run an investment management organisation if you could. So we have to recognise and have an honest dialogue about our internal strengths and weaknesses,” he says. In addition to active versus passive, the board has also asked the investment team to research commodities – whether they are really a hedge against inflation, or more just daily volatility – and next financial year to look at liability driven investing.

In July the board set a new asset allocation to its target policy, which saw the investments shift slightly to 54 per cent in global equities, 20 per cent in fixed income, 12 per cent in real estate, 12 per cent in private equity and 1 per cent in cash. It is now neutral to the policy benchmarks but it has been underweight global equities for much of the past year. “What we are actively trying to evaluate is whether we want to be underweight global equities or overweight. The economic signs around us aren’t very strong, they are less weak, but that’s a far cry from saying there is economic growth,” Ailman says. “It has been frustrating to see this rally it has really surprised us.

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