CalSTRS has nearly halved the exposure of its $10.8bn sustainable investment portfolio to “activist strategies” in a bid to reduce risk.
The Californian public pension giant has “significantly restructured” its Sustainable Investments and Stewardship Strategies’ (SISS) since 2019, cutting the proportion of assets in “high-tracking error activist strategies” from 45% to 26% by February 2021.
On the back of a recommendation from staff last month, CalSTRS is now considering introducing an “active risk budget” to the SISS portfolio, which would formally limit the extent to which performance could deviate from a benchmark over time – otherwise known as ‘tracking error’.
CalSTRS has been introducing such budgets to its broader portfolio since 2020, starting with conventional public equities. The latest proposal suggests adopting a tracking error of 50-250 basis points relative to a Custom MSCI ACWI IMI index.
The SISS portfolio is currently invested exclusively in public equities, although there are plans to move some of it into private equity over time.
CalSTRS revealed that since February 2019 it has shifted 7% of the portfolio away from “activists” towards low-carbon indices including BlackRock’s Low-Carbon Transition Readiness Exchange Traded Funds. It also moved 12% of assets towards undisclosed “sustainability-focused active strategies”.
CalSTRS did not name the asset managers that had lost mandates as a result of the switch.
In a document, the fund describes “activist” strategies as “concentrated limited partnerships in which managers acquire large individual public equity positions in order to engage company boards and management teams – particularly on governance matters – to promote policies and practices that create long-term value”.
The shift away from such strategies, which tend to own concentrated portfolios and therefore have a higher tracking error, has already reduced forecasted tracking error for SISS from more than 250bps in February 2019 to 174 bps in February 2021, CalSTRS stated. It said staff forecasted further reductions to activist strategies in favour of other sustainability strategies for risk reasons.
Aeisha Mastagni, a Portfolio Manager at CalSTRS, told RI that activist strategies were originally the only type of strategy the fund invested in as part of its sustainability segment, which was then called the Corporate Governance Unit. She described the shift away from such strategies over the last few years as part of a “more holistic view” CalSTRS was now taking.