US CalSTRS Pension Fund Set to Borrow US$30B to Maintain Liquidity
(8 January 2024 – United States) The second largest US pension fund, the California State Teachers’ Retirement System - CalSTRS, is set to borrow over US$30 billion to manage cash without liquidating assets at undervalued prices.
The policy would enable staff to borrow as much as ten percent of the estimated US$318 billion portfolio with the proposal enabling leverage to be used “on a temporary basis to fulfill cash flow needs in circumstances when it is disadvantageous to sell assets” according to a CalSTRS policy document up for review on 11 January.
CalSTRS uses leverage of about four percent of its almost US$318 billion portfolio. The pension fund has an annualised return of 7.2 percent over the past five years, exceeding its seven percent return target. In the 2022/23 fiscal year CalSTRS posted a 6.3 percent net return.
“This move is not aimed at altering asset allocation policy but as a flexibility measure to manage liquidity more effectively. The proposed borrowing strategy is designed to avert the necessity of selling assets at an unsuitable time, thereby preventing potential fire sales” stated BNN Breaking Manager Safak Costu.
“This consideration for augmented leverage comes partly as a response to the dwindling value of its US$52 billion commercial real estate (CRE) portfolio, which has been detrimentally impacted by escalating interest rates. The CRE portfolio, accounting for roughly 17 percent of CalSTRS’s assets, was one of the top-performing asset classes for the fund until the pandemic hit, and the Federal Reserve embarked on aggressive interest rate hikes”
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