CalSTRS pares down U.S. equity exposure in market’s record run

Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System (CalSTRS), poses for a portrait before an interview with Reuters in New York City

By Daniel Bases and Robin Respaut

NEW YORK (Reuters) – Record high U.S. stock prices are providing the California State Teachers’ Retirement System with profit-taking opportunities as it cuts exposure to U.S. equities and moves money off shore, the plan’s chief investment officer told Reuters on Wednesday.

Christopher Ailman, the chief investment officer of CalSTRS, as the system is known, said he did not see the U.S. economy as growing much beyond a 1-2 percent range, although he hopes it can average 3 percent in the years ahead.

“We have enjoyed obviously the benefits of this equity rally in the USA, but we still don’t think the US economy is that strong,” Ailman said in an interview while visiting investors in New York.

“We have been shaving off profits in the U.S. equity market every time we hit new highs like this and rebalancing into Europe and Asia,” said Ailman, who oversees $200 billion in assets.

Earlier on Wednesday the benchmark S&P 500 stock index <.SPX> traded above its record closing high, but tipped down by the close after the Trump Administration unveiled the basic outline of its proposed tax reforms that calls for a slashing of business tax rates.

“We are going to stay at about 50 to 55 percent global equity exposure. We had a home country bias to the USA for the last, almost, decade. We were 65 percent US. We are reducing that down to where eventually it will be about 55 percent US, 45 percent non-US.”


CalSTRS has looked to real estate and infrastructure for opportunities to deliver returns closer to 8 percent. Ailman said real estate was “almost priced to perfection,” and the fund had become a net seller of that asset.

Infrastructure has been trickier but nonetheless important to the pension fund, which has about $3 billion worth in the portfolio, Ailman said.

CalSTRS, like most U.S. public pension funds and other large institutional investors, prioritize infrastructure deals that generate long-term, stable cash flows. But those deals are scarce and often overpriced. The majority of transactions are in Canada, Australia and the United Kingdom, despite the critical need for more infrastructure investment in the United States.

“We’re hopeful. I’ve never seen such an enormous capital need and so much capital trying to go to work,” said Ailman. “There’s an appetite, just not a lot of transactions.”

U.S. public pension funds are under increasing pressure to return investment around 7 percent without taking on too much risk. Mature funds like CalSTRS pay out more in benefits to retirees than collect in contributions from current workers. Because of this negative cashflow, CalSTRS must be more attentive to short-term, downside risks, said Ailman.

In response to these risks, CalSTRS created a risk mitigation strategy to be more resilient to market downturns.

The strategy, which focuses on being less correlated to global stocks and economic downturns, uses 30-year government bonds, commodity trading advisors (CTA) and global macroeconomics focused hedge funds.

Ailman hopes the strategy will reach a target allocation of 9 percent by June 2018 from its current 4 percent level.

(Reporting By Daniel Bases in New York and Robin Respaut in San Francisco; Editing by Chris Reese)