CalSTRS Selects Lehman Brothers U.S. Aggregate Index As Fixed Income Portfolio Performance Benchmark

News release

Sacramento, CA – The California State Teachers’ Retirement System today adopted the Lehman Brothers U.S. Aggregate Index (excluding tobacco) as its benchmark to track the performance of its internally managed long-term fixed income portfolio. The nation’s third largest pension fund, at $100 billion, examined various customized and broad market-weighted indices before selecting the Lehman Brothers index.

“After a lengthy review, we feel the Lehman Aggregate best represents our investment opportunity set and is the best benchmark for our fixed income portfolio,” said Christopher J. Ailman, CalSTRS chief investment officer. “We are very pleased to work with Lehman Brothers in the evolving fixed income marketplace.”

CalSTRS uses a benchmark to measure the performance of its $27.9 billion domestic fixed income portfolio. The portfolio is managed by CalSTRS staff except for high yield bonds, which are targeted at 5 percent of the fixed income portfolio. CalSTRS does not currently have an allocation to non-dollar fixed income securities. Structural changes to the fixed income portfolio as a result of the new benchmark will be done gradually over an extended period.

The previous benchmark, the Large Pension Fund Index, had been customized for CalSTRS in 1987 by Salomon Brothers. It is a fixed-weight index heavily weighted toward U.S. Treasury debt. The change to Lehman Brothers Aggregate Index followed study by CalSTRS staff and its consultant, Pension Consulting Alliance, of it, the Salomon Brothers Broad Investment Grade Index and the Merrill Lynch U.S. Broad Index.

The switch was recommended because the CalSTRS staff and PCA concluded a market-weighted index would provide better diversification to the portfolio. While all three indices considered could provide broad market coverage, Lehman Brothers contains the largest number of issues, at more than 6,700 issues, and is the only one that includes the Commercial Mortgage-Backed Securities market.

CalSTRS typically reviews the suitability of its performance benchmarks about every three to four years. The last such review for the fixed income portfolio was in March 1999. CalSTRS finished such a process in May for its domestic equity portfolio and changed to the Russell 3000 (excluding tobacco).

CalSTRS serves approximately 687,000 members and benefit recipients by providing retirement, disability and survivor benefits to California’s public school educators in grades kindergarten through community college. Those benefits are guaranteed by law and are not affected by changes in the investment portfolio.