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CalSTRS review finds risk-mitigating strategies met objectives during major drawdowns
Summary
CalSTRS staff and consultants told the Investment Committee that the system's Risk Mitigating Strategies (RMS) program met its objective since 2016, performing in major equity drawdowns and supplying liquidity in 2022; staff said RMS will continue to evolve and staff/consultants will propose policy refinements.
The Investment Committee received a strategic review of CalSTRS' Risk Mitigating Strategies (RMS) program on Jan. 8, 2025. Staff and external consultants said RMS was designed to protect the fund during large equity drawdowns and has met that objective since its inception in July 2016.
Carrie Lowe, a portfolio manager who has worked with the RMS program since its inception, told the committee RMS is intended to "protect a lot like insurance, but without an explicit premium." Lowe described two episodes in which RMS performed as intended: the COVID-related drawdown in 2020 and the market shock in 2022 following Russia's invasion of Ukraine and high inflation. In both episodes RMS returned nearly 6% and, in 2022, provided roughly $2 billion of capital that supported CalSTRS' liquidity and benefit payments.
Staff presented analysis showing that, had CalSTRS replaced RMS with long-duration fixed income since 2016, the system would have experienced a larger loss in the 2021–22 fiscal year. The staff-and-actuarial comparison estimated RMS reduced a 3%-plus loss to about 1.3%, an improvement staff said translated to approximately $5 billion in funding-status benefit compared with the fixed-income alternative.
External advisors from Auburn and Makita supported the staff conclusion and noted RMS is a specialized, functional component of the total fund rather than a conventional asset class. James Walsh of Auburn said the program is well constructed and praised the staff for governance processes. Mika Malone of Makita emphasized that RMS construction requires bespoke manager selection and ongoing evaluation because it has no single market benchmark.
Staff said RMS must keep evolving to address shifting market structure and the fund's growth, and they will present further implementation specifics and policy options in closed-session and at a March follow-up. The committee asked staff to consider implementation details, strategy mix, fee arrangements and how to scale the program as the fund grows.
