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CalSTRS CIO warns of 'Pandora's box' of geopolitical risks; fund raising cash and lowering equity exposure
Summary
CalSTRS Chief Investment Officer Scott Chan told the Investment Committee the fund is increasing liquidity, underweighting global equities, and preparing for multiple scenarios including deglobalization, tariffs, and rising deficits that could reshape capital flows.
Chief Investment Officer Scott Chan opened the investment portion of the May 2025 meeting by urging the committee to adopt a “prepared mind” and to build portfolio resiliency for an uncertain global backdrop. Chan said staff have shifted the fund to a more defensive posture by reducing global equity exposure and increasing cash and fixed-income positions to preserve liquidity for opportunities.
“Like Pandora’s box, opening it is unleashing unintended and some unpredictable consequences,” Chan said. He listed four “keys” for navigating volatility: diversification and disciplined rebalancing; cash and liquidity; dynamic asset allocation; and the investment team and partners. He reported the fund is “the most diversified we’ve been” historically and that short-term securities are being used as a holding area for increased cash.
Committee members asked where the cash is being held. Chan said staff have placed funds in short-term, high-quality securities such as government-backed instruments that are currently earning materially positive yields (discussion noted short-term yields near 4–4.5% in the transcript).
Chan outlined risks he termed “new and emerging,” notably a shift toward deglobalization and tariffs that could trigger higher inflation, lower GDP and slower investment if abrupt policy changes occur. He highlighted the possibility that capital may reallocate away from U.S. dollar assets if trading partners reorient supply chains and trade relationships, which would create a case for further diversification beyond conventional U.S.-centric allocations. He also cited the federal deficit and structurally higher interest rates as a medium-term risk.
Staff and consultants emphasized scenario analysis. Steve and Alan from the consultant teams described the committee’s historical scenario work — stress tests that examine how the portfolio would respond to episodes like stagflation or sharp interest-rate moves — and urged continued planning rather than quick action. Chan closed by reiterating a long-term view: “Fortune favors the prepared mind,” and CalSTRS should be ready to act when market opportunities are validated by the team’s analysis.
