CalSTRS Advances Current Work on Risk Based Asset Allocation
Board approves innovative approach in modern financial marketplace

News release

 WEST SACRAMENTO, CA  – The California State Teachers’ Retirement System (CalSTRS) Investment Committee today approved a new approach in evaluating elements of portfolio risk.

The approach incorporates new ideas on investment risk, including an innovative concept of overlaying risk across the asset classes, rather than replacing asset classes with risk categories. Another innovation is the development of six broad risk factors, including governance regulation, such as accounting rules and tax laws. The study culminates research that was listed on the fiscal year 2009-10 Investment Committee Work Plan.

“This new and innovative tool adapts the thinking that has been developed by other funds to the unique needs of CalSTRS in order to protect our gains and to continue to strengthen the financial security of our member and their families,” said Harry Keiley, Chair of the CalSTRS Investment Committee.

Peer funds who contributed analysis on risk include ATP-Denmark, Alaska PFD and CalPERS. Money managers were PIMCO, Bridgewater and GMO.

Modern portfolio theory identifies diversification as the key to reducing risk. By using investments that are less correlated, the overall portfolio will have a reduced volatility and overall risk. The study, however, concluded that the global market declines in 2001 and 2008 showed diversification failed and the theory did not hold up when needed most.

The approved CalSTRS approach calls for the evaluation of risk across the entire portfolio; not dividing the portfolio by exposure, but rather overlaying risk factors across the entire portfolio.

“While our action builds on the work at other funds and leading money managers, we’ve taken the current thinking in investment theory and pushed it to a new level to position our portfolio for continued growth,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “The overlay model will allow us to analyze multiple risks across the entire portfolio, and not be limited by the old framework.”

The resolution includes six core risk measures:

  • Global Economic Growth Risk
  • Interest Rate Risk
  • Inflation Risk
  • Liquidity – Fluid Markets
  • Leverage/Financing
  • Governance Risk

Staff and consultants will now develop measures for each risk and integrate the risks into future Investment Committee reports.

The California State Teachers’ Retirement System, with a portfolio valued at $146.4 billion, is the second largest public pension fund in the United States. It administers retirement, disability and survivor benefits for California’s 852,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.