Portfolio Value Doubles in Five Years
21 Percent Return in 2007
Seventy-five cents of every CalSTRS benefit dollar comes from investment earnings. So when our investment portfolio has a strong year, that's good news for the Teachers' Retirement Fund. Investment earnings this last fiscal year were not only good — they were among the best in the nation.
“By any measure, 2006-07 will go down as one of our most spectacular years,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “We played it smart when the opportunities arose and it demonstrates a consistent flow of great investment decisions over the last five years. The CalSTRS board deserves credit for giving us the tools to attract and retain quality staff and set the right benchmarks and structure to succeed.”
Thanks to smart management and favorable markets, the portfolio gained an amazing $26 billion in value in fiscal year 2006-07, a one-year investment return of 21 percent. At year end, the fund was valued at $170.4 billion.
These earnings put us in the top one percent of funds in our class, according to the Wilshire Trust Universe Comparison Service, and in the top five percent as measured by the State Street Universe of funds greater than $10 billion.
Not only were last year's earnings stellar, they followed three straight years of double-digit investment returns. Over the last three years, the fund has earned an average of 14.9 percent per year. The total dollar value of CalSTRS investments has doubled since the U.S. stock market drop in October 2002.
In addition, our 10-year average annual return is 9 percent, greater than the 8 percent average necessary to help meet projected long-term benefit liabilities.
Not long after our 2006-07 earnings were announced, the market created some ups and downs in our portfolio (see below). And despite excellent money management, the pension system still has a projected long-term funding shortfall. For more information on how the CalSTRS board is working to address this issue, see "CalSTRS Funding Gap Narrows."
CalSTRS on the Sidelines of the Sub-Prime Mortgage Crisis
As we celebrated one of our most profitable years (July 1, 2006 — June 30, 2007), the market began a series of sharp ups and downs. On July 19, 2007, we hit an all-time high of $175 billion, followed by a decline to $169 billion by the end of August, 2007. But by the end of September, the fund had bounced back to a new high of $176.9 billion.
The financial market decline was fueled by the sub-prime mortgage crisis. Thanks to the careful policies guiding our portfolio management, our exposure to this investment vehicle is extremely low — less than 1/10 of one percent of the total portfolio. Therefore, we avoided chasing yields and buying many of the unrated risky securities. Our strength comes from being well diversified across several different investment categories and by not overreaching for a high return beyond a prudent level of risk.
CalSTRS investment professionals believe the ups and downs in the marketplace aren't over yet, and we expect further weakness in the mortgage market and residential real estate market. However, you can rest assured that our portfolio is built on a solid foundation capable of weathering this latest financial storm.
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