US - The California State Teachers' Retirement System (CalSTRS) is considering increasing its target allocation to real estate as the Board proposes temporarily shifting $6bn from global equities to higher returning debt investments.

CalSTRS's Board has suggested increasing the pension fund's target allocation to property by 2% to 13% as part of plans to focus on investing in discounted debt in real estate, private equity and fixed income assets, and to take advantage of the short-term market movements.

"We are to invest not in distressed securities, but rather in solid securities from distressed sellers; the opportunities in distressed priced debt, high-yield bonds and other categories that have an expected return of 15% or greater," said CalSTRS in its investment policy and management plan revision paper.

A spokeswoman for CalSTRS said in addition to increasing the long-term target to real estate, the pension fund is also considering increasing the range by 7% to 19% as this would provide flexibility for managing the portfolio during troubled times and help the pension fund avoid having to sell assets to keep within its asset range.

CalSTRS has insisted, however, these proposals did not mean the pension fund would be making more real estate investments and would not be chasing targets.

The pension plan's revision paper said the real estate portfolio would be made up by a direct real estate investments, joint venture investments and commingled funds with adopted targets of 50% to core and 50% to riskier tactical investments.
The Board has proposed an increase in its allocation to private equity, by 2% to 11%, and a reduction in the allocation to global equity by 5% to 55%.

"The programme will increase in size and reach its objective in one year, but only as fast or slow as quality investment opportunities exist. As a tactical investment strategy, it will only exist as long as the current capital crisis continues," said CalSTRS.

The spokeswoman for CalSTRS said the proposals, if approved, are likely to be in place for the next 18-24 months.

The $119bn (€93bn) US pension fund has already laid out $1bn for the proposals and is also considering creating a new $2bn innovation portfolio. 

The investment committee will conduct a first reading of the policy change proposals at its next meeting on 5 March 2009, when members will be able to voice any questions or concerns and make any changes. The committee is then expected to reach a final decision on the policy by April.