CalSTRS board questions costs of advancing collaborative investing model

The initial phase of the model is already saving the California State Teachers’ Retirement System close to $300 million a year in fees, CIO Christopher J. Ailman said at the investment committee’s July 7 meeting.

Collaborative model 2.0, and eventually 3.0, could more than double those savings, increasing to $700 million a year or more within the next 10 years, Mr. Ailman said.

The difference between the initial version of the model and 2.0 includes the expansion of private equity co-investments, ownership in real estate companies, separate accounts and co-investments in infrastructure, and the in-house investment of global equities, fixed income and risk-mitigating strategies, a report to the investment committee said.

CalSTRS had $126.5 billion in global equities, $49.1 billion in real estate, $46.9 billion in private equity, $33.3 billion in fixed income, $31.7 billion in risk-mitigating strategies and $17 billion in inflation-sensitive assets (primarily infrastructure) as of May 31.

But CalSTRS has to implement the whole model to get the full savings, he said.

“What is holding us back are some hard decisions, and you are already balking at it (the hard decisions),” Mr. Ailman said.

Among the next steps in implementing the upcoming phases of its collaborative model, CalSTRS officials want to continue hiring executives with investment banking and direct investment skills. This is necessary because the next steps also include moving to gain more control, more oversight and take on more risks over their investments, and CalSTRS officials will be doing all of this during a global energy transition away from fossil fuels, Mr. Ailman said.

Much of the board member concerns centered around the cost of implementing the collaborative model, especially when it comes to increasing employee compensation. In order to do business differently with staff exercising more control over investments, CalSTRS has to offer “competitive pay,” Mr. Ailman said.

“It doesn’t have to be the highest compensation, but it must be competitive,” he said.