California State Teachers’ Retirement System (CalSTRS) is to consider investing in infrastructure debt as part of its $10.9bn (€9.2bn) “inflation sensitive” portfolio.

In an investment committee report, the $307bn pension fund said “the team will explore and evaluate the merits of establishing an infrastructure debt strategy”, citing the potential for “portfolio diversification and attractive risk-adjusted returns and cash yield”.

CalSTRS has been expanding its infrastructure equity portfolio in recent years, which is expected to make up between 65% and 70% of inflation-sensitive portfolio over the coming 12 months, but it has yet to invest in infrastructure debt.

In a report for its investment committee this week, CalSTRS said it expects the inflation-sensitive portfolio to rise from 4% to 6% of total assets by 2023, and the expansion would “focus on infrastructure investments”.

Infrastructure assets held by the pension fund are expected to rise by $1.5bn over the coming fiscal year.

“The team was very busy in the infrastructure market during the past year and we continue to expect there to be a growing number of opportunities both in the US, Asia and Europe,” it said.

CalSTRS will also monitor opportunities in emerging markets.

The pension fund said it would also increase its exposure to renewables, which make up part of its $1.58bn sub-portfolio of low-carbon investments, but only where the risk-return metrics were justified.

“However, we are very much aware of the heated competition for many of these assets and have walked away from assets that we believe are overpriced,” it said.

As for the pension fund’s larger $37.2bn real estate portfolio, which represents around 12% of total assets, CalSTRS said it would focus on assets that can provide “durable income”, including multifamily, industrial, and specialist property types, together with private debt investments.

It will also pursue “develop-to-core” strategies in the industrial, life-sciences and certain residential sectors, and “seek out opportunities to take advantage of the dislocation cause by COVID and the pending economic recovery”.

CalSTRS also plans to expand its use of “highly controlled joint ventures” and strategic investments in real estate operating companies.

“Expanding these highly aligned structures will generate higher returns through improved deal flow and fee savings,” it said.

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