CalSTRS | Pension360

CalSTRS Sells Stake In Texas Skyscrapers

CalSTRS has sold its stake in two buildings in Austin, Texas.

The first, One Congress Plaza, is the 8^th tallest building in Austin and a city landmark. The second, San Jacinto Center, is a 21-story office building also located in downtown Austin.

From IPE Real Estate:

Parkway Properties said it has unwound its joint venture with CalSTRS in Austin, Texas, taking the latter’s 60% interest in San Jacinto Center and One Congress Plaza.

The deal gives Parkway full control of the two properties.

Parkway also said it has transferred its 40% interest in Frost Bank Tower, 300 West 6th Street and One American Center to CalSTRS.

Overall, the deals resulted in net proceeds of around $43.6m (€34.7m).

CalSTRS could invest up to $2bn in global real estate over the next 12 months, as reported earlier this year.

The US investor is planning to deploy between $1bn and $2bn in core and value-added strategies in the US, Latin America, Western Europe and Asia.

During the same period – the 2014-15 fiscal year – CalSTRS will reduce its exposure to opportunistic real estate investments.

CalSTRS manages $22 billion in real estate assets.

Photo by Stephen Curtin

Video: CalSTRS CIO Talks Passive Investing and the “Upside Potential” of the Japanese Market

Christopher Ailman, chief investment officer of CalSTRS, sat down with CNBC on Tuesday and talked about the “upside potential” of the Japanese market. He also discusses index investing and when to actively manage investments.

Pension Official: Here’s How Congress Could Make Investing in Environmental Projects More Appealing to Pension Funds

Girard Miller, CIO of the Orange County Employees Retirement System, sat down with Governing magazine yesterday to talk about what’s holding many public pension funds back from taking on “green” investments.

Miller first explains the concept of “green bonds”. From the Governing interview:

These are bonds issued to finance environmentally friendly capital projects. One use of the concept applies very narrowly to tax-exempt bonds for what are called brownfields development. Then there is also an international working group promoting “climate bonds,” which are sometimes called green bonds. CalSTRS, the large state teachers pension fund here in California, is part of that working group. The central idea is to reduce the carbon footprint globally through infrastructure projects that can be funded through big bond issues. I use the term green bonds very broadly to include essential environmental projects that might be funded by states and localities through bond financing. Beyond carbon reduction and water conservation in drought areas, I’ll leave it to the policy geeks and public finance guys to haggle over the definition. It’s a big tent.

Miller goes on to talk about the problem with “green bonds”: they are tax-exempt, and, in his words, pension funds “don’t want tax-exempt paper in their portfolios.”

But he says Congress can fix that problem, and in the process make the bonds more appealing to some of the world’s largest institutional investors. From the interview:

The problem is that pension plans don’t want tax-exempt income. We’re not the only ones. Sovereign investment funds from abroad, such as those in China and the Middle East, and endowment funds don’t care about taxes either.

[…]

What we need is a taxable option to be approved by Congress and limited to green bonds, not to every conceivable capital project, which is typically what happens when politics gets involved. A taxable bond option (TBO) is a concept that has been kicking around in public finance circles for four decades. As far back as the 1970s, economists like John Petersen were saying there is a smarter way to do this stuff. Build America Bonds, which were authorized in 2009-2010 at the bottom of the Great Recession, were a taxable option. A TBO allows, but does not require, a muni bond issuer to elect to pay taxable interest and receive a direct interest-cost reimbursement from the U.S. Treasury rather than the indirect subsidy of tax exemption. In most cases, that would mean a lower borrowing cost — net-net — than issuing tax-exempt bonds. For pension plans, a TBO-yield will compare favorably with corporate credit and foreign sovereign bonds, plus the bonds would be a diversifier for our bond portfolios. Foreign investors and endowment funds, as well as ordinary investors with incomes below $200,000, would prefer taxable municipals.

Read the whole interview here.

Photo by penagate via Flickr CC

CalSTRS Stepped Up “Green” Bond-Buying By 300 Percent In 2014

CalSTRS released its Green Initiative Task Force report on Wednesday. The report highlights the pension fund’s “environmental-themed investments” and risk-management efforts related to climate change.

The report reveals that it increased its purchases of “green bonds” by 300 percent in 2014. Investopedia defines a “green bond”:

These bonds are created to encourage sustainability and the development of brownfield sites. The tax-exempt status makes purchasing a green bond a more attractive investment when compared to a comparable taxable bond. To qualify for green bond status the development must take the form of any of the following:

1) At least 75% of the building is registered for LEED certification;

2) The development project will receive at least $5 million from the municipality or State; and

3) The building is at least one million square feet in size, or 20 acres in size.

From a CalSTRS press release:

California State Teachers’ Retirement System’s (CalSTRS) eighth annual Green Initiative Task Force report shows an almost 300 percent increase in green bond purchases within the Fixed Income portfolio. This year, the Teachers’ Retirement Board identified sustainable investing as a key, strategic priority, which is reflected in the report and other initiatives.

The growth in green bonds aligns with a commitment that CalSTRS Chief Executive Officer Jack Ehnes made during his participation in the 2014 Climate Summit where he announced that CalSTRS will more than double the fund’s clean energy and technology investments of $1.4 billion to $3.7 billion over the next five years. The move is in response to United Nations Secretary-General Ban Ki-moon’s call for bold action to build resilience to the impacts of climate change.

“Targeting the clean energy and technology sector provides a good investment opportunity while positioning CalSTRS for a low-carbon future,” noted Ehnes. “But more importantly, we hope our actions will help catalyze incentives for comprehensive climate change policies that ultimately lead up to a global agreement in Paris in 2015.”

CalSTRS sees a growing number of investment opportunities in low-carbon solutions, especially as renewable technology costs come down and regional clean energy policies take hold.
“Our growth of green-related investments is a good example of successful engagement on environmental and climate risk issues,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Looking forward, we hope to bring more attention to the role large institutional investor’s play in financing green bonds, clean energy and climate change initiatives.”

The entire Green Initiative Task Force report can be read here.

Photo by penagate via Flickr CC

Survey: 81 Percent of Pension Funds Looking to Bring More Investment Management In-House

CalSTRS recently announced its plans to eventually manage 60 percent of its assets internally. According to a recent survey, a majority of pension funds are beginning to think the same way.

A survey by State Street released this week found that 81 percent of pension funds are planning to bring more investment management duties in-house in the near future.

From BenefitsPro:

81 percent of funds are exploring bringing more management responsibilities in-house over the next three years.

Cost concerns are driving the trend, as 29 percent of funds said it is becoming more difficult to justify the fees paid to outside managers.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management,” said Martin Sullivan, head of asset owner sector solutions for North America.

The State Street data doesn’t suggest that outside management will become obsolete, but rather that pension funds are becoming more judicious about how they select and manage outside relationships.

The largest funds have the capacity to handle multi-asset management in-house, but they are in the minority, Sullivan noted.

“The majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” he said.

The survey examined responses from 134 defined benefit and defined contribution funds around the globe.

The survey also found funds are willing to take on more risk:

While pensions funds re-examine their relationships with outside managers, 77 percent are also reporting a need to increase their risk appetite to boost lackluster returns.

That means a greater push into alternatives, as equities and fixed-income “may look pricey.”

“Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives,” according to the report.

The full report, called “Pension Funds DIY: A Hands-On Future for Asset Owners,” can be found here.

CalSTRS Aims to Bring More Investment Management In-House

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.

CalSTRS Appoints Three Key Investment Staff As Fund Completes Restructuring

CalSTRS has finished a restructuring of its investment staff, and announced Friday it had made three key appointments: the fund hired its first Chief Operating Investment Officer, as well as new directors of Fixed Income and Inflation Sensitive investments.

From a CalSTRS release:

Debra Smith has been selected CalSTRS Chief Operating Investment Officer (COIO). Glenn Hosokawa was named director of the $22.4 billion asset class, Fixed Income, the funds’ second largest. Paul Shantic was named Director of Inflation Sensitive, the newest and smallest asset class with an investment portfolio at $1.4 billion.

“These three appointments, coupled with our 2010 creation of a Deputy Chief Investment Officer, completes a new organizational structure that allows us to bring more assets in-house,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “This structure matches what you find in most large investment money managers. This also fits our plans to internally manage more of our assets–currently at 45 percent in-house–to a projected 60 percent internally managed.”

[…]

All three moved up from high-level positions in CalSTRS. Ms. Smith was director of investment operations. Messrs. Hosokawa and Shantic were acting co-directors of Fixed Income. All three come with deep knowledge and experience in finance and investment management and operations.

CalSTRS’ inaugural COIO, Ms. Smith, has risen through the ranks at CalSTRS from associate investment officer in 1998 to director of investment operations in 2010. She holds a Bachelor of Science degree from Fresno State University in business administration, finance and marketing. In 2012 she received a certificate as a graduate of the CalSTRS Management Academy. Ms. Smith is currently enrolled in the CalSTRS Executive Development Program with a graduation date of November 2014.

“I look forward to collaborating with investment management at CalSTRS and with our strategic business partners to put in place adaptive and innovative solutions to achieve our mission, which is securing the financial future and sustaining the trust of California’s educators,” Ms. Smith said.

More on the fund’s new investment staff structure:

The new structure has the COIO overseeing Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. The new position will also directly report to the Investment Committee twice per year. This fulfills a goal of CalSTRS’ internal auditors, who recommended the separation between investment management and investment operations.

“This new structure puts in place a smoother operation for a portfolio of our size and allows for better oversight by the board, the Deputy CIO and myself,” said Mr. Ailman, adding that: “The competition for these positions was very intense and was nationwide in scope, which speaks well for the quality of the talent we have in house.”

Read the entire release, including bios of the three appointees, here.

Pension Funds Push Back Against Bank of America Governance Changes

Three of the country’s largest public pension funds are pushing back against Bank of America’s recent decision to appoint Brian Moynihan as CEO and chairman.

A shareholder resolution had previously mandated that the positions be separate.

Now, pension funds are telling Bank of America it has poked its “finger in the eye of investors.”

From the Wall Street Journal:

Three of the largest pension systems in the U.S. are pushing back on the bank’s move, announced earlier this month. The resistance from the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the adviser to New York City’s five pension funds may result in a variety of steps to try to improve governance, including a shareholder campaign to challenge the move in the spring, according to people familiar with the matter.

Bank of America set off these investors’ ire when its board changed the bank’s bylaws Oct. 1 to allow it to combine the chairman and CEO roles, then announced later that day that it had given the chairman’s job to Mr. Moynihan. The move essentially unraveled a binding 2009 shareholder resolution to separate the positions. A majority of shareholders, including the three pension systems, had voted for that change at the bank.

“They have flaunted the will of the shareholders,” said Anne Sheehan, corporate-governance director at the California State Teachers’ Retirement System, or Calstrs, the second-largest pension fund in the U.S. by assets. “It’s like the board poking their finger in the eye of investors,” said Michael Garland, director of corporate governance to New York City Comptroller Scott Stringer, who advises the five New York City pension funds.

Collectively, the three pension systems control 93 million Bank of America shares, or about 0.9% of shares outstanding, according to the most recent data available.

Bank of America’s board is within its rights to combine the positions, because the board of virtually any company incorporated in Delaware is allowed to alter corporate bylaws, even if it means undoing a previous shareholder change.

Warren Buffett, another large shareholder, said he supported the move. From the WSJ:

Some big shareholders supported the move, including Warren Buffett , whose Berkshire Hathaway Inc. made a $5 billion investment in the bank in 2011.

“I support the Board’s decision 100%,” Mr. Buffett said in an email Wednesday in response to questions from The Wall Street Journal. “ Brian Moynihan has done a superb job as CEO of Bank of America and he will make an excellent Chairman as well.”

A CalSTRS spokesman told the Wall Street Journal that it is talking with other shareholders about next steps. The pension funds could use their sway to vote out certain board members; they could also file another shareholder resolution, similar to the one in 2009, which would prohibit the CEO and chairman positions from being occupied by one person.

Video: CalSTRS CIO Talks Long Term Investing And Handling Market Volatility

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Chris Ailman, CIO of the California State Teacher’s Retirement System, sat down with CNBC last week to talk about handling market volatility, re-balancing the fund’s portfolio and being a long-term investor.

Ailman also talks about why CalSTRS invests in hedge funds and why that won’t be changing any time soon.

Video credit: CNBC

CalSTRS: Financial Risk of Climate Change “Very Real” For Institutional Investors

CalSTRS has been one of the most active (and vocal) pension funds in the world this year when it comes to exploring the financial risk of climate change.

The fund announced last month it was joining forces with Mercer and a handful of other pension funds to study the market impact of climate change.

Now, CalSTRS has commented on a new report showing the “profound lack of preparedness” for climate change among the nation’s insurance companies.

The pension fund calls for institutional investors to be “more mindful of market exposures to environmental risks.”

From a CalSTRS release:

The Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations was released today by Ceres, a nonprofit sustainability organization mobilizing business and investor leadership on climate change and other sustainability challenges, ranks property & casualty, health, and life & annuity insurers that represent about 87 percent of the total U.S. insurance market. Ceres found strong leadership on the issue in fewer than a dozen companies nationwide.

“Environmental, social and governance risks and issues such as climate change are very real for CalSTRS. This new report enables large institutional investors to be more mindful of market exposure to environmental risks through our insurance investments,” said CalSTRS Chief Executive Officer Jack Ehnes. “More importantly, the report gives us better perspective on how well, or not, insurance companies are responding to climate change risk.”

The report states, “… insurers are on the veritable ‘front line’ of climate change risks, and there is compelling evidence that those risks are growing. Rising sea levels and more pronounced extreme weather events will mean increasingly damaging storm surges and flooding. Hurricane Sandy alone resulted in over $29 billion in insured losses.”

“Meaningful change in the recognition of climate risk to the investment portfolio will come from an alignment of interests, and who better to take leadership this effort than the insurance industry,” added Ehnes. “The foundation of the insurance model is based on risk analysis, so ignoring the risk of climate changes seems most imprudent. Clearly, more action on the part of the insurance sector is needed.”

Last month, CalSTRS announced plans to double down on its clean energy investments.

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