CalSTRS hammers out wording on ‘contractual alignment’ with external asset managers

Giant fund develops set of eight investment beliefs

California pension giant CalSTRS has finalised the wording of its ‘investment belief’ about how its interests should be aligned with its external asset managers and advisors.

It’s the last of eight such beliefs that have gone through a drafting process for approval by the $223.8bn (€191bn) fund’s board.

The latest text, which is amended slightly from an earlier version states:

“Alignment of financial interests between its advisors is critical. In keeping with existing policies, guidelines and procedures, CalSTRS is best served when there is contractual alignment and transparency of financial interests with its external investment advisors and managers.”

It’s the culmination of a process dating back to 2015, when the fund’s Investment Committee begun a project to develop an Investment Beliefs statement.

The project concluded at the February 2018 meeting with the adoption of the alignment statement which has since been tweaked.

Investment beliefs as a topic has been around since about 2010, championed by the likes of Roger Urwin at Willis Towers Watson.

As part of its process, CalSTRS heard from Urwin, global head of investment content at the investment consultant, and Henry Jones, chair of the investment committee at fellow California giant CalPERS. The project was facilitated by Allan Emkin of the Pensions Consulting Alliance (PCA).

CalSTRS has admitted that meetings on the topic saw “robust discussion”.

The alignment belief was the last to be debated and as late as April 2017 was still up for grabs, with the fund saying the Investment Committee was “still considering whether it will adopt” it.

Belief 7 is that responsible corporate governance, including the management of environmental, social and governance 
(ESG) factors, can benefit long-term investors like CalSTRS. 
Other beliefs cover the benefits of diversification, the efficiency or otherwise of public markets, managing investment cots, internal management, illiquid investments and short-term drawdown risk.Also coming out of the board meeting, according to documents, was the finding that CalSTRS believes that it is not currently possible to base proxy voting decisions around ethnic diversity, due to a lack of reliable data.

A memo by staff members Aeisha Mastagni and Mary Hartman Morris explained that they had researched the ability to vote based on ethnicity and the racial composition of portfolio companies and “found many challenges” – not least because it is not an SEC requirement. It was a response to California Treasurer John Chiang’s “30 and 30” call for greater engagement on board diversity.

“An asset manager trapped inside the body of a governmental structure”

Also noteworthy in the board documents was a discussion about CalSTRS’ vision of itself as a “not-for-profit financial institution” with its investment branch as a huge money manager in its own right and a ‘for-profit financial institution’ that has to make over $15bn in net revenue annually.

“The bottom line: the Investment Branch is an asset manager trapped inside the body of a governmental structure,” says the preamble to investment business plans, signed by senior investment staff including CIO Chris Ailman.

It notes how CalSTRS has to compete for investments and investment managers in a world with sovereign wealth funds, five to eight times its size, and “Canadian pension plans that operate like private companies.”

It estimates the ‘governmental’ business model translates into to an annual handicap of around $900m a year.

“At some point, our 1970’s broken model will need to be modernized.” It’s hoped that a new collaborative model may offer “some improvements and hope for a more efficient future”.