Solid Investment Returns Cause for Cautious Optimism

Blog entry Jack Ehnes

Great news! In June, we posted a solid one year return of 12.2 percent for the CalSTRS investment portfolio, the first positive return in three years. It’s certainly cause to celebrate, and a welcomed sign that steps taken by the CalSTRS board and investments staff to position the fund for ongoing recovery are working.

However, we should celebrate this milestone with cautious optimism, mixed with a dose of perspective.

We Can’t Invest Our Way Out

While investment earnings are the single largest source of funds to pay benefits, because of the historic market declines we can’t invest our way out of our current funding shortfall.

It would take returns of more than 20 percent a year for the next five years to fully fund the CalSTRS benefits already earned. Closing the funding gap will require gradual, predictable increases in contributions, not impossible investment expectations.

This is not to discount the accomplishments made through the Teachers’ Retirement Board and investment staff’s adjustments to our portfolio and operations. They’re significant. These adjustments strategically positioned the fund for ongoing recovery by:

  • Expanding target asset ranges to avoid having to sell at a loss.
  • Temporarily shifting 5 percent of the portfolio from global equities to fixed income, real estate and private equity to take advantage of the distressed market.
  • Permanently shifting 5 percent of the portfolio from global equities to create a new absolute return asset class for inflation-protection.
  • Adopting a new asset allocation mix to further diversify the portfolio and reduce its stake in the global stock market.
  • Launching the Innovations and Risk unit to explore new investments such as a macro global hedge fund strategy, commodities and microfinance.
  • Reducing costs through renegotiation of our contracts with our outside investment managers.

We’ve also kept in mind that investing for a pension plan is like running a marathon. The single year return is like the pace of just one mile. We’ve focused on the longer term results.

The 12.2 percent return shows our strategy appears to be paying off.

Let’s Talk About the Solution

But, I do have a concern. The encouraging returns for each of our asset areas we reported to the media may give the public and the legislature a false sense of security that CalSTRS funding shortfall can be solved through our investment strategies alone.

That, unfortunately, isn’t the case. While we’ve successfully taken steps to position the portfolio for long-term growth, we’re not out of the woods yet. While we celebrate our success, let’s remember to keep talking. The path out of the woods lies in a plan for gradual, predictable increases in contributions


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