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CalSTRS CIO warns of ‘unprecedented, world-changing’ policy risk; outlines liquidity and diversification steps
Summary
CalSTRS Chief Investment Officer Scott Chan told the investment committee that policy-driven uncertainty — tariffs, geopolitical conflict, deficits and immigration policy — raises recession and stagflation risk and described steps the fund is taking to increase liquidity and diversify into private markets and fixed income.
Scott Chan, CalSTRS chief investment officer, told the Investment Committee on March 12, 2025, that recent policy shifts are producing an unusually high degree of market uncertainty and that the fund has positioned its portfolio to increase liquidity and diversify away from concentrated equity risk.
In a prepared report and subsequent questions from trustees, Chan said the four main policy-driven risks he is monitoring are tariffs (and the potential for a trade war), the Russia–Ukraine conflict and related geopolitical risks, a widening federal deficit and immigration-related impacts on GDP. “I just came up with the words unprecedented and world changing,” Chan said, describing the potential effects of aggregated policy moves on markets and economic growth. He added that this environment has increased the probability of recession and, in some scenarios, a short bout of stagflation.
To prepare, Chan outlined four layers of portfolio positioning: maintaining a diversified strategic asset allocation informed by liabilities; an annual asset-allocation plan to shift positioning over one- to three-year horizons; tactical positioning through the Risk Allocation Committee (RAC); and active risk-management and liquidity tools. He said the fund has increased allocations to defensive diversifying assets, reserved liquidity to exploit crisis-driven opportunities, and is accelerating selective private-markets allocations where managers can deliver higher risk-adjusted returns.
Chan said CalSTRS has strengthened several tools since prior crises — expanded liquidity tools, a total-fund management team, and a more deliberate annual asset-allocation process — and that the fund will use those tools if markets deteriorate. “We need to stay the course,” Chan said, arguing a long-term, diversified strategic allocation gives the best chance to meet the fund's return objective even if short-term volatility causes temporary losses.
Trustees asked how the RMS portfolio, fixed income and cash are being used within the diversifying bucket. Chan and RMS staff explained that public fixed income has recently been overweighted relative to RMS because of expected total-return advantages in the current rate environment; staff said the mix between fixed income, RMS and cash will be dynamically adjusted as conditions evolve.
Trustees also pressed staff about private markets governance and labor and human-capital risks. Counsel reminded the committee of federal preemption and the National Labor Relations Act limits on certain public disclosures or operational involvement when an ongoing labor dispute exists; staff said detailed, transaction-specific discussions would continue in closed session where necessary.
Chan concluded that staff expects the year ahead could present meaningful drawdowns and that the fund’s earlier work to enhance liquidity and risk tools increases CalSTRS’ flexibility to respond.
