CalSTRS Acts in Face of Historic Global Market Drop
Teachers pension takes steps to tough it out.
WEST SACRAMENTO, CA – The California State Teachers’ Retirement System (CalSTRS) investment portfolio ended the fiscal year set to ride out historically bleak economic times.
Preliminary estimates are that CalSTRS saw a loss of 25.0 percent in the fiscal year ending June 30, 2009,* with its market value of assets totaling $118.8 billion. The news from the second-largest public pension fund in the U.S. comes in the face of an unprecedented worldwide economic downturn. Global markets declined 30.8 percent for the year, according to Standard & Poor’s Global Equity Indices.
“Despite the recent losses suffered by public pension funds, defined benefit pensions remain the bulwark of our economy with trillions of dollars in the marketplace,” said CalSTRS Chief Executive Officer Jack Ehnes. “As patient, long-term investors designed to withstand market turmoil, we provide financial security to our members and essential liquidity to the market.”
Poised for recovery
This past year CalSTRS acted to manage the market volatility and to take advantage of opportunities presented by the economic meltdown.
As stocks prices plummeted, the value of the CalSTRS private equity holdings rose in proportion within the portfolio, exceeding the allowable policy ranges. CalSTRS expanded the target asset ranges to avoid forced sales of holdings at the bottom of the market.
Additionally, CalSTRS acted by:
- Temporarily shifting 5 percent of the portfolio from global equities to fixed income, real estate and private equity to purchase quality assets from distressed sellers.
- Permanently shifting 5 percent of the portfolio from global equities to create a new asset class, Absolute Return, for such inflation-protected assets as infrastructure investments.
- Adopting a new asset allocation mix that further diversifies the portfolio while reducing its stake in the global stock markets.
“These extreme economic conditions challenge even the most sophisticated investor. We have taken proactive steps at the height of the crisis,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Our recent actions position us for the coming recovery and we have the resolve and structure in place to recoup our losses and more.”
Real estate mark down
In addition to the severe downturn in the global stock markets, the return results were affected by how CalSTRS recorded the unprecedented drop in real estate values. CalSTRS recorded or “wrote down” the value of its worldwide real estate holdings in a single year, rather than spreading out the expected losses over several years.
“We’re now in a position to turn around our real estate returns with new, creative strategies, including acquiring high-quality assets from distressed sellers at attractive deep discounts,” said Ailman.
Returns by asset class were: Fixed Income 4.5 percent; Private Equity -27.6 percent; Global Equities -28.2 percent; and Real Estate -43.0 percent.
As of June 30, 2009, the portfolio holdings were: 54.2 percent in U.S. and non-U.S. stocks, 21.9 percent in fixed income, 12.1 percent in private equity, 11.0 percent in real estate, and 0.8 percent in cash.
Recovery won’t close funding gap
The CalSTRS board is working together with stakeholders to address a long-term benefits funding shortfall of $22.5 billion as of June 30, 2008. While investment earnings are the single largest source of funds to pay benefits, the historic market declines show investments alone cannot close the funding gap. Closing the gap will require legislative action in the future to increase contributions made by the school districts and the state.
“Our members’ benefits are secure, yet the current economic picture clearly illustrates investments alone cannot meet pension obligations in the long term,” said Ehnes. “We are not in a crisis to resolve the contribution gap, but the sooner a solution is found, the lower the cost.”
The California State Teachers’ Retirement System is the second-largest public pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 833,000 public school educators and their families from the state’s 1,400 school districts, county offices of education and community college districts.
* Private equity and real estate returns are for 12 months ending March 31, 2009, and are subject to change. Final investment returns will be published in the 2008-09 Comprehensive Annual Financial Report.