US - CalSTRS will allocate 5% of its portfolio to absolute return, increase alternatives and slash its equity allocation if proposed changes to its asset allocation mix are approved at an investment committee meeting next week.
Staff at the California State Teachers' Retirement System are proposing cutting global equity from a 60% target to 47% of the US$118bn portfolio.
Other changes include increasing private equity to 12% from 9%; real estate to 15% from 11% and cash from zero to 1%, according to a memo to the board. The target for fixed income will remain unchanged.
However, CalSTRS chief investment officer Christopher Ailman said the most significant change is the addition of the absolute return asset class.
He wrote: "As discussed during the asset allocation study, this asset class can include a variety of investments; the common factor will be a higher correlation to inflation and a lower correlation to global equities.
"On average, across the asset class, we are looking for nominal returns of 6.5% with a volatility or standard deviation of 6.1%."
Initially, he said, investments will include inflation protection, or inflation-linked, bonds and infrastructure.
Ailman said: "Inflation linked bonds, which are offered by the US government and other major developed nations, are fairly liquid and can be purchased reasonably quickly. Infrastructure, on the other hand, will take three to five years to build up a multi-billion dollar portfolio."
The proposed changes are a result of an asset liability review that started six months ago. Under the new asset line-up, the pension fund will target an average return of 8.5% with an expected standard deviation of 12.2%.
Last month, the pension scheme reported the worst returns in its 96-year history.
Returns were down 25% in the year ended June 30, though global equity markets were down 30.8%.
To mitigate losses, CalSTRS had temporarily moved assets out of equity and into fixed income, private equity and real estate.
As a result, its actual asset allocation is underweight equities and overweight all other asset classes.
The investment committee will vote on the new asset allocation at its August 13 meeting.
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