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CalSTRS Moving To Reduce Risk in its CRE Portfolio

Country’s Second Largest Pension Reports Healthy Investment Returns in 2012-13
July 17, 2013
Adopting a theme for the coming year of “focusing on what matters most,” the California State Teachers Retirement System (CalSTRS) with nearly $166 billion in assets will look to move more of its real estate investments to core assets.

CalSTRS’ investment committee presented its 2013-14 fiscal year business plans to the full board this month. The real estate plan calls for moving more of its holdings out of opportunistic assets into the core category, making direct sales out of the portfolio and encouraging fund managers to liquidate fund investments, and diversify by investing outside of the U.S.

The proposed change in strategy is somewhat unusual in that it comes at a time when more investors are seeking higher yields by moving outside core markets and acquiring assets in secondary and tertiary locations.

The pension fund holds about $22.3 billion in commercial real estate assets. The current make up is about 37% core, 17% value add and 46% opportunistic. The risk goal is 50% core, 20% value add and 30% opportunistic.

"Just in everyday life, we find ourselves distracted with well-meaning important distractions that don’t directly contribute to the core things that matter most," Christopher Ailman, CalSTRS chief investment officer noted in his presentation. "It is more evident than ever that, if the Investments branch doesn’t singularly focus on delivering its objectives, nothing, no matter how important today, will matter 30 years from now."

"The biggest challenge is to clear aside the important day to day distractions and focus on the critical core mission. As we all have experienced in life, it is much easier said than done," he said.

Refocusing the real estate portfolio also comes with challenges, CalSTRS noted.

"Although we anticipate reaching our goal of 50% by 2015, we are cognizant of the relatively high prices in the market for core assets,” the committee noted in its presentation. “Also in order to lower the overall allocation to real estate, we are selling the most liquid non-strategic core assets that, in the short term, hamper our strategy to increase core holdings.”

When available, CalSTRS investment staff said it would utilize “develop-to-core or lease-­to-core strategies.”

In working to reduce its overall real estate allocation, the fund noted that the market opportunity to sell assets is favorable at this time. However, because it is a limited partner in several investments made between 2005 and 2008, the pension fund investment firm has limited control over the decision to bring those assets to market.

CalSTRS' real estate program is currently 85% weighted to U.S. assets and 15% non-U.S. and the investment firm has been working with its real estate investment advisor, Cleveland-based Townsend Group, to diversify investments outside of the U.S.

CalSTRS noted that its international portfolio has dropped significantly in size over the last few years as it has emphasized U.S. core investments and liquidated higher risks global investments. Now that it wants to reverse that course.

For its full fiscal year ended June 30, West Sacramento-based CalSTRS reported that steady growth in the global equity market fueled a 13.8% investment return for the fund.

Investment returns have been erratic over the past several years. The current performance followed a lackluster year with the fund returning only 1.8% in 2011-12, preceded by a 23.1% return in 2010-11.

CalSTRS’ real estate portfolio posted a 14.1% return last year, 3.6% more than its benchmark target. Last year, real estate posted a 9.2% return, 4.2% below the benchmark.


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