CalSTRS to build strategy to take advantage of esoteric opportunities

Many investors may miss opportunities due to difficulties placing some investments into specific, defined asset classes.

California State Teachers’ Retirement System intends to revise an existing allocation “sleeve” to expand its ability to capture opportunities that fall between asset classes and both public and private markets.

Many investors may miss opportunities due to difficulties placing some investments into specific, defined asset classes. CalSTRS’ proposed Total Fund Opportunities looks to remedy some of this problem facing the $323 billion fund.

Currently, CalSTRS allocates up to 2.5 percent of its assets to an Innovative Strategies Portfolio for opportunities that do not easily fall into one category. It also recently launched a similar portfolio managed by its Sustainable Investment and Stewardship Strategies (SISS) team.

CalSTRS staff would like to combine a new Opportunities Portfolio with the existing Innovative Strategies and SISS portfolios for bigger transactions on a longer-term horizon than those currently allowed. In addition, the Opportunities Portfolio would also source for investment across a broader set of asset classes than currently allowed – including private equity.

These combined portfolios would be classified as Total Fund Opportunities.

“This can help us find the best opportunities at the best speed and the best scale. It will help us streamline our process so we can react quickly. Right now, we don’t have the structure to react to these opportunities quickly,” said CalSTRS deputy chief Investment officer Scott Chan at a board meeting held on Thursday.

Chan cited an example to the board of a renewable energy platform that may contain development risks too risky for infrastructure investments but with returns too low for a private equity opportunity.

According to documents provided by Chan to the CalSTRS board, adviser Meketa said US-based peers have similar portfolios with maximum allocations of 5 percent to 10 percent.

The possible Total Fund Opportunities allocation still requires discussions about governance and possible policy changes, along with its inclusion in asset allocation modeling, before it can be made official.