US - The California State Teachers' Retirement System will discuss implementing an ‘almost radical' new asset allocation that will divide assets into risk buckets, instead of traditional asset classes.
At an investment committee meeting on November 4, staff and board members will consider divvying up its $138.6bn in assets based on their characteristics - like sensitivity to inflation, stable return, or growth - rather than equity or debt.
The idea was first discussed at the September meeting but a final recommendation from staff and consultants won't come until February.
"The purpose of this Investment Committee project is to look at the portfolio through a different lens, to help quantify and manage risk in a different way," said a memo to the board written by chief investment officer Chris Ailman.
"While this may seem like a simple exercise, it turns the foundation structure of the investment portfolio on its head. We define our world by asset classes; this structure ignores the traditional definition....This new idea for asset allocation is almost radical in today's setting."
If the CalSTRS board approves the changes next year, the US pension scheme will join the ranks of the Danish pension fund manager ATP and sovereign wealth fund Alaska Permanent Fund.
ATP divides its assets into a beta and alpha portfolio. The beta portfolio, which comprises 98.5% of its $84bn in assets, is carved into nominal interest rate risk portfolio, credit risk, equity oriented risk, inflation-related risk and commodity-related risk. The alpha portfolio is comprised of long/short equity strategies.
The Alaska fund is in the process of implementing a new structure that divides assets into cash, interest rates, company exposure, real assets and special opportunity pools.
In a report to the board written by Neil Rue, managing director at Pension Consulting Alliance (PCA), Rue said the traditional way of developing asset allocations is falling by the way-side.
"Recent market developments have forced institutional investors to rethink their understanding of risk and how they manage it. Given the growing complexity and globalization of the investment markets, there is recognition that structuring portfolios strategically using only the asset class framework is becoming obsolete.
"In its place, investors are organizing their portfolios, in whole or in part, by risk classes," Rue wrote.
He said investors are realising they've relied too much on equity risk premium to drive portfolio returns.
PCA is putting together a report on risk-based asset allocation that will be presented to the board in February.
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