The California State Teachers' Retirement System (CalSTRS) provides retirement, disability and survivor benefits for California's 965,000 prekindergarten through community college educators and their families CalSTRS was established by law in 1913 and is part of the State of California's Government Operations Agency.
As of September 2020, CalSTRS is the largest teachers' retirement fund in the United States. CalSTRS is also currently the eleventh largest public pension fund in the world. As of October 31, 2020, CalSTRS managed a portfolio worth $254.7 billion.
Pension fund Calstrs braced for writedowns in $50bn property portfolio [Financial Times April 18, 2023]
One of the biggest public pension plans in the US is preparing to write down the value of its $52bn real estate portfolio in the latest sign that higher interest rates and the recent turmoil in the banking sector are causing pain in the property sector.
“But the fund’s chief investment officer told the Financial Times that he was now bracing for write-downs in the value of assets in its property portfolio amid growing evidence that the Federal Reserve’s rapid monetary tightening over the past 12 months has knocked valuations in the sector.”
CalSTRS expected to consider using leverage to manage risk
[Pensions & Investment Nov 20 2023]
The California State Teachers' Retirement System, West Sacramento, currently (already) has leverage policies related to certain asset classes: real estate, inflation sensitive and securities lending, and uses derivatives such as futures in fixed income and global equity.
Calstrs Seeks to Borrow More Than $30 Billion to Manage Cash [Bloomberg 4th Jan 2024]
The California State Teachers’ Retirement System, the country’s second-largest pension fund, may borrow more than $30 billion to help it maintain liquidity without having to sell assets at fire-sale prices, according to a new policy its investment committee will consider this month.
If approved, the policy will allow staff to borrow as much as 10% of the roughly $318 billion portfolio. The proposal calls for leverage to be used “on a temporary basis to fulfil cash flow needs in circumstances when it is disadvantageous to sell assets,” a Calstrs policy document said.
|
Asset Type |
Net asset value (in millions) |
|
Public Equity* |
123,828 |
|
Fixed Income |
33,229 |
|
Real Estate* |
49,401 |
|
Private Equity* |
51,255 |
|
RMS |
26,551 |
|
Inflation Sensitive |
19,888 |
|
Cash / Liquidity |
8,259 |
|
Innovative strategies* |
4,966 |
|
Strategic overlay |
413 |
|
Total investment assets |
317,790 |
Many years of Zero Interest Rate Policy post the financial crisis drove bond yields lower the US 10 year reaching a lowest yield of just above 0.5% forcing all investors of this type to chase yield as they compete, and benchmark themselves, against each other
Liz Truss, was Prime Minister of United Kingdom for only 49 days. The least time in office ever.
In response to the rising cost of living and increased energy prices, her ministry announced the Energy Price Guarantee. The government then announced large-scale tax cuts and borrowing, which led to financial instability and were largely reversed. More importantly Liz's policies were in direct contrast to the Bank of England's then policy of raising rates. Facing mounting criticism and loss of confidence in her leadership, Truss announced her resignation as leader of the Conservative Party on 20 October.
The Markets facing what was clearly a poorly thought-out economic policy from a new leader with no economic or financial markets experience said we’re not funding this borrowing. Gilts and Sterling fell sharply and the Bank of England was forced to step in the stabilise markets.
The collapse of the Gilts markets revealed pension funds, fund managers had been chasing yield and using leverage.From Bank Of England‘s Anatomy of 2022 Gilt Market Crisis: “Highly leveraged, liability-driven investment (LDI) strategies of certain pension funds and asset managers have been identified as an amplifier of the crisis:”
Gilt Futures Collapse
The goal of investing in LDIs is to make sure that an investor with long-term financial commitments such as a pension fund or insurance company has the income-generating assets it needs to satisfy its financial obligations (e.g., payouts to plan participants and customers making claims).
Thus liability-driven investing focuses on matching the cash flow generated by assets to the cash flow required by liabilities and then minimizing risks that could affect returns, such as those associated with interest rate fluctuations and market volatility. Hedging strategies involving derivatives can be used to help reduce this risk.
Because the objective of these portfolios is to generate income and mitigate risk, the returns typically are lower than those offered by portfolios with a more aggressive, higher risk approach to investing,
Pension fund blowup faces brutal second act [Reuters]
Bank of England Governor Andrew Bailey stepped in to save pension plans that use so-called liability driven investment strategies (LDIs). These funds, managed by the likes of Legal & General (LGEN.L) or BlackRock, allow pension plans to match payments to retirees with similar long-dated assets, like 20-year gilts. They used derivatives and leverage to juice-up returns, but that left them facing margin calls from bank counterparties when UK Prime Minister Liz Truss’ unfunded spending plans caused bond prices to collapse.
There was much publicity around the state of US bank balance sheets and valuations of bond portfolios which led to the demise of Silicon Valley Bank and 2 others. The 3 biggest US bank failures ever all in March 2023 and big losses at US regional banks with under-water Commercial Real Estate portfolios.
The Federal Reserve was forced to intervene
Bank of America nurses $100bn paper loss after big bet in bond market
Eventually the FED came to the rescue with the Bank Term Funding Program, a program expected to last 3 months but still currently being used, and possibly extended.
We've seen this movie before and recently.