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Consultant says CalSTRS outperformed policy over 10 years, flags consumer stress, concentration and political risk
Summary
Makita Investment Group told CalSTRS the fund outperformed its policy benchmark over the 10-year period but lagged some peers over one year; consultants highlighted household liquidity/credit-card delinquencies, concentration in the largest stocks, and election-related political risks as top near-term concerns for portfolio resilience.
Makita Investment Group presented its semiannual consultant report to the CalSTRS investment committee, reporting mixed short-term and strong long-term results and outlining the principal risks the fund faces.
Steve McCourt said the fund's trailing 1-year return through June 30 was 8.4%, about 1 percentage point above the policy benchmark but below the median public fund and the reference portfolio; over 10 years the fund returned 7.7% annualized and outperformed the policy benchmark by 40 basis points per year. Consultants attributed long-term outperformance in part to a larger allocation to private markets and the fund's collaborative model.
Makita highlighted three near-term risks for the fund: (1) consumer stress and depleted household liquid wealth, which could reduce spending and increase delinquencies; (2) concentration of returns among the largest U.S. stocks (the so-called "magnificent 7" or the top 10 names), which raises market concentration risk; and (3) political risk tied to the upcoming election, including policy uncertainties and tariff or fiscal outcomes that could influence inflation and interest rates. McCourt and colleagues said these are known risks the fund is structured to mitigate via diversification, liquidity and risk-management processes, but they also noted surprises can drive material market moves.
Committee members asked whether the portfolio's current strategic allocations and band widths are adequate; consultants and staff described ongoing work: regular RAC (risk) committee meetings, widened asset-class bands, liquidity tools (including selective use of derivatives and rebalancing), and efforts to increase exposure to asset classes such as industrial real estate and private credit where managers see opportunities.
Makita also presented asset-class-level detail: global equities and fixed income remain primary drivers of risk and return; real estate had experienced a period of valuation declines but consultants signaled a possible inflection point; private equity performance remained strong though fundraising and exit activity had slowed. Staff said policy changes, pacing decisions, and the total fund division are intended to preserve flexibility while the committee monitors exposures.
