Feb 11, 2019 · 1h 17m · capital-allocators
Chris Ailman – CalSTRS' Venerable CIO (Capital Allocators, EP.86)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Chris Ailman, longtime Chief Investment Officer of CalSTRS, who shares his strategies for managing a $220 billion public pension fund amidst bureaucratic hurdles, fee pressures, and evolving market dynamics. Ailman outlines CalSTRS's multi-decade approaches to internal indexing, risk mitigation, private equity co-investing, ESG integration, and multi-generational stakeholder governance.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 16.6% of the talking time here. How this is scored →
Ted as informed peer 3.9 Guest teaching 3.8 Guest disagreement 2.2 Ted pushing back 1.8
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 1:04:30 Divestment Fallacy
Chris emphatically dismisses divestment, stating that 20 years of data proves it accomplishes no social change and that engagement is the only effective route.
Hardest push from Ted ▶ 27:08 Why Not Just Index Everything?Ted directly challenges the entire premise of active governance and alternative allocations by asking why a fund with such constraints does not simply index all assets.
Biggest teaching moment ▶ 13:38 20% Funded vs UnderfundedWhen Ted asks if troubled pensions are 20% underfunded, Chris bluntly corrects him that they are only 20% funded, exposing the true severity of certain state plans.
Ted holds their own ▶ 34:47 Identifying Portfolio OffsetsTed displays technical portfolio construction insight by questioning whether the inflation-sensitive bucket directly offsets existing fixed-income credit exposures.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Career Beginnings and the Flawed Government Model | 3 | 4 | 2 | 1 | Ted prompts Chris on his early career and government background. Chris explains the structural flaws of operating an investment firm inside a government entity, comparing it to international public-private models. | |
| Debunking Pension Panics and Looming 401(k) Crises | 4 | 6 | 4 | 2 | Chris reframes the public narrative of a pension panic by comparing pension obligations to a 30-year mortgage and points out the true crisis is in underfunded 401(k) plans. He also sharply clarifies when Ted asks about funding percentages. | |
| Pension Governance and Multi-Generational Member Communication | 3 | 3 | 1 | 1 | Ted asks how governance and communication operate across a vast constituency. Chris details the mechanics of board turnover and tailoring communication from Instagram to older members. | |
| Establishing Investment Beliefs and Portfolio Indexing | 5 | 4 | 2 | 4 | Ted points out that given the high friction and size constraints, a logical conclusion would be to simply index the entire fund. Chris walks through CalSTRS' heavy passive allocation and where active management still makes sense. | |
| Asset Allocation, Inflation Hedges, and Risk Mitigation | 5 | 3 | 1 | 2 | Ted probes into specific asset allocation buckets including inflation-sensitive assets and risk mitigating strategies. Chris outlines how they structure non-correlated assets and flight-to-quality hedges. | |
| Sponsor Message: Ridgeline Investment Management Platform | 4 | 4 | 3 | 2 | Following the mid-episode sponsor read, Chris discusses the immense fee load of private equity and the scale challenges of deploying billions. He explains the CalSTRS collaborative model to bypass traditional fund structures. | |
| The Innovation Lab and Tactical Overlay Management | 4 | 3 | 1 | 2 | Ted asks about internal innovation teams and overlay strategies. Chris illustrates how they test-drive concepts like risk parity, gold, and microfinance before scaling them up or discarding them. | |
| ESG Integration, Divestment Realities, and Firearms Principles | 4 | 5 | 5 | 1 | Chris forcefully rejects divestment as an ineffective tool for social change, arguing instead for active engagement and coalitions, citing their firearm principles initiative. | |
| Global Allocator Voice and The 300 Club | 3 | 2 | 1 | 1 | Ted asks about the 300 Club and Chris explains the initiative to unite global CIOs to produce practical investment research and act as industry canaries in the coal mine. |
Statements from this episode (28)
CalSTRS Hires Money Managers Using State Cement Procurement Rules
“But frankly, it takes me almost nine months to hire a money manager. Because of the procurement rules, I have to use the same rules that Caltrans uses to buy cement, or somebody else buys equipment. I have to use that to hire money managers. They don't recogni…”
US Is Unique in Keeping Public Pensions Embedded Inside Government
“The USA is about the only place Where particularly the pension plan asset management side is still very much part of the governmental entity. We're definitely in the org chart under the executive branch of California state government, right there with CalPERS …”
US Public Pensions Will Eventually Spin Out Into Independent Entities
“And I've often said that at some point someone's going to look at this and say, hey, this is crazy, a flawed model. We need to move it external and operate it. Oddly enough, Delaware is the only place that you've seen that that happened in the eighties and nob…”
Teacher Pension Plans Are Typically the Most Underfunded in the US
“So most of the time, when you look at plans around the country, it's the teacher plan that's the most underfunded.”
Later Baby Boomers With 401(k)s Risk Retiring Into Poverty
“And we're going to see a crisis of people, the ladder into the baby boomer pulling out on their four one K and retiring into poverty.”
Average State Pension CIO Tenure Is Only Four Years
“I have seen the average tenure of a state pension CIO is only four years, and that has been true since the 19 eighties, and I think the reason for the constant turnover is, often time, the governance is unclear, and They run into problems about what decisions …”
CalSTRS Manages Half of Its Total Fund Internally
“We run half the fund in house, a hundred and ten billion dollars, which would be a huge money manager anywhere else.”
CalSTRS Runs 70% of Its US Equity Portfolio In-House
“70% of our U.S. Equity is indexed. We run in-house, but it's indexed. And even then, about another 15% of that is in what now is called smart beta.”
CalSTRS Runs Internal Strategies at One-Tenth the Cost of Wall Street
“Frankly, we can run money at one-tenth the cost of hiring somebody here on Wall Street to do the same thing”
CalSTRS Uses 100% Active Management for Emerging Market Equities
“Nine U.S. Equity in the developed markets were 50% indexed, and emerging markets were a hundred percent active.”
Management Fees Have Eaten Up Almost All Active Strategy Alpha
“When you look at it, the cost has eaten up almost all of the alpha inactive strategies.”
CalSTRS Portfolio Asset Allocation Breakdown Across Major Asset Classes
“Right now, we're about 54% global equity, and we are truly global, so about fifty-fifty U.S. And non-U.S. We've got probably 12% right now in fixed income, and that's mostly domestic, but we've got a little bit of universal global fixed income. 12% in real est…”
CalSTRS Fully Exited TIPS Portfolio When Yields Turned Negative
“So we sold out the entire portfolio when they were at negative yields, and went to the board and said, it just doesn't make sense to be there yet.”
A 2008-Scale Market Crash Is a 60-to-70-Year Event
“We spent a lot of time really studying 2008. We thought it was a one, 1.5% likely occurrence, and realized that, you know what, in this day and age, it's probably closer to a four percent occurrence. And for the listeners, that's in essence, instead of a hundr…”
Full Portfolio Put Protection in 2007 Would Have Cost 300 Bps
“We even, I remember in oh seven being called into the Department of Finance to ask myself and the counterpart at CalPERS to price out buying puts for the entire portfolio. And we came back and said, you know, it'll cost you 300 basis points on the return. Woul…”
Large Pension Plans Have Broken the Traditional 2-and-20 Fee Model
“I have said for probably over five years that two and 20 is gone, and that's been broken. Unfortunately, small plans still have to pay that, but larger plans have gone through that.”
CalSTRS Commits Approximately $6 Billion Annually to Private Equity
“We commit about six billion a year into private equity.”
Private Equity Premium Over Public Markets Compressed to 150 Bps
“Back when I started in private equity in the nineties, you could get 500 over the public markets. Then it narrowed to about 300. And now the debate today is at one 50 net of cost.”
Private Equity Vintages From 2015 to 2019 May Underperform
“Recognize that probably the 2015, 1617, 18, maybe even the 19 vintage year may not be great returns because the price multiple is so high.”
Indexing Private Equity Across Hundreds of Funds Underperforms Public Equities
“Some funds, particularly near us and then here on the East Coast, have decided to take the index method and invested with hundreds of partnerships. And what you find is you get the average return out of private equity, which is actually below public Equity.”
CalSTRS Research Found Gold Fails as an Inflation Hedge
“We took a deep dive, look at gold. Is it a commodity? Is it an inflation hedge? Is it a currency hedge? What the heck is it? And came back with a lot. And unfortunately the answer is for us, it wasn't any of those, but some of our peers have bought it.”
CalSTRS Spends $3 Million Annually on Corporate Governance Unit
“It's now 15 people. A budget of about three million dollars a year that we spend on corporate governance.”
Divestment Fails to Bring About Social Change
“We have proven time and again for the last 20 years that divestment does not bring about any social change, and people have to realize boycotts are generally ineffective unless you can get everybody Involved in them.”
CalSTRS Ranks Outside the Top 20 Global Capital Pools
“We're the number two fund in the USA, the largest education only fund in the world. But when you look at long-term capital, we don't even rank in the top 20.”