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CalSTRS Beats Benchmark Thanks to Strong Equity Returns

The retirement system’s consultant said that for 2019, the U.S. equity market continued to reach “higher and higher highs.”

The California State Teachers’ Retirement System posted strong returns for the six-month period ended December 31, a new plan document shows.  

CalSTRS, which had a total of $254.1 billion invested as of December 31, returned 18.4 percent over the one-year time period, beating its benchmark by just under one percentage point. 

CalSTRS’s consultant Meketa Investment Group said in its semi-annual report on the retirement system’s performance that “the U.S. equity market continued to ‘melt-up’ to higher and higher highs.” 

Over the one, three, five, and ten-year periods, CalSTRS’s global equity portfolio, which includes corporate governance and sustainability public equity assets, beat its benchmark, the performance report showed.  

“For calendar year 2019, U.S. stocks had a positive, very strong return, mostly because December 2019 was such a positive month,” according to Meketa’s performance report. 

CalSTRS’s total portfolio outperformed the benchmark on its three- and five-year basis, according to the semiannual report. However, it underperformed its ten-year benchmark, returning 9.3 percent as compared with the benchmark’s 9.5 percent.  

According to the report, “legacy performance” in private markets portfolios resulted in the underperformance. The retirement system’s private equity portfolio returned 12.8 percent for the ten-year period, as compared with the 14 percent benchmark.  

CalSTRS announced last month that it planned to decrease its allocation to public equities by eight percentage points in favor of investing more money into private equity, real estate, and other asset classes.  

Although over the ten-year period, these asset classes underperformed their benchmarks, they did outperform over the one, three, and five-year periods.  

“Private equity remains, and is expected to remain, an important return driver for CalSTRS,” according to Meketa. “However, private equity involves relatively high fees and less transparency compared to other asset classes.” 

CalSTRS’s long-term target allocation for private equity is 13 percent, the report shows. CalSTRS committed $2.2 billion to private equity investments in the second half of 2019, bringing the year’s total commitments to $7.6 billion. 

“Recently, contributions have begun to outpace distributions as value from prior periods becomes fully realized and recent commitments are being drawn for new investments,” according to Meketa. 

[II Deep Dive: CalSTRS to Cut Public Equity Allocation in Favor of Private Markets]

In addition to the plan’s performance, CalSTRS trustees will discuss small changes to asset allocations during its monthly meeting on Wednesday. 

According to the investment meeting agenda, CalSTRS plans to increase its asset allocation to inflation-sensitive strategies – which include any investment that protects against inflation – from four percent to six percent over the next four years.  

CalSTRS will also make changes to its innovation portfolio strategy, which was created in 2009 to “incubate strategies and to diversify away from equity risk to protect against large market drawdowns.” 

CalSTRS plans to add two sub-portfolios into its innovation portfolio strategy: a strategic portfolio that will make long-term strategic investments that don’t fit elsewhere in CalSTRS’s portfolio, and an opportunistic portfolio that will make short-term investments to take advantage of mispricing, distress in the market, or tactical opportunities. 

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