Ohio STRS Increases Target Private Equity Allocation

By David G. Barry

The State Teachers Retirement System of Ohio (STRS), which has been criticized by its members for the fees it pays out to private equity and other investment firms, has increased its targeted allocation to private equity. The new target, however, is still short of what STRS currently has invested in the sector.

in March, the STRS Board approved increasing the $94.8 billion pension plan’s private equity target to 9% from 7%. That move also brings its target for alternatives to 19% from 17%.

 The other portion of its alternatives bundle – described as opportunistic/diversified – remains at 10%. To reach these figures, STRS is reducing its target for U.S. equities to 26% from 28% and its target to international equities to 22% from 23%. It is increasing fixed income to 17% from 16%. Real estate remains at 10%.

STRS’ current overall asset mix, though, shows that the market value of its PE and alternatives’ holdings already exceed the new targets. According to February 28 data released by STRS, private equity has a market value of $10.9 billion, or 11.5 % of the mix – down slightly from $11.1 billion and 11.7% in June. The opportunistic/diversified segment, meanwhile, was at $8.4 billion in February, or 8.9%. That’s up from $7.6 billion and 8% in June.

Nick Treneff, STRS’ director of communications, tells Markets Group that the “current allocation is within the rebalancing range for the asset class, so there is no requirement make changes to the allocation.”

The move to increase the target was made as a result of a five-year asset-liability study conducted by STRS’ investment consultant, Callan LLC. STRS said the adjustment is designed to provide a “similar risk/return profile to the current asset mix.” Callan projects that the new asset mix will earn a return of about 6% over the next 10 years, but projects higher returns over a longer time horizon.

STRS has more than 500,000 beneficiaries – more than 150,000 of which are retirees. The pension fund recently moved to provide those retirees their first cost-of-living increase (COLA) since 2017. The 3% adjustment will begin going to retirees starting July 1. Driven in part by the lack of an increase over the past five years, the Ohio Retired Teachers Association (ORTA) had an analysis commissioned which claims that STRS’ reliance on active managers may have cost it as more than $400 million annually from 2015 to 2018. 

In a lengthy response to that report, STRS  said those figures were incorrect and that it misapplies data regarding STRS’ policy return. Rather, it said that active management added net value of 0.16 %. STRS, in its report, also stressed that “investment fees are appropriately scrutinized” and that the pension fund does “not pay lavish fees to Wall Street for doing nothing.” It also said that “investment costs and performance are accurately reported by the Retirement System.”