Tuesday, September 12, 2006

CALSTRS Loads up on Real Estate

The California State Teachers' Retirement System, the nation’s second largest public pension fund ($144 billion assets) will be significantly changing its asset mix. The new long-term asset allocation targets are: 40% US equity, 20% Non US equity, 9% Private Equity, 11% Real estate and 20% Fixed Income. The portfolio change shifts 6 percent of the portfolio from fixed income and 1 percent each from U.S. equity and cash. The real estate portfolio will see the largest increase at 5 percentage points; alternative investments will receive a 3 percentage point increase.

This is a relatively large adjustment in the portfolio’s overall risk return profile which recognizes the increased returns the asset base must produce to fund liabilities. It seems to be an even larger long term bet that public markets returns will under-perform private markets.The Plan’s capital market estimates are nominally higher than what we would consider to be mainstream estimates these days, especially when using a 2.25% inflation rate. US and Non US Stocks 9%, US Bonds 4.75%, Cash 3.5%, TIPS, 4.5%, Real Estate 7.5% and Alternative Investments 12.5%. By way of comparison the 2006 Wilshire Report of State Retirement Systems used US and Non US Stocks 8.25%, US Bonds 5%,Real Estate 6.25% and Private Equity 11.75%

Heroic asset allocations and capital market assumptions look like they can save the day but often just move the day of reckoning into the future.

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