The California State Teachers Retirement System (CalSTRS) is one of the largest pension funds in the country, so when its management talks, many people listen. Grace Reyes of The Investment Diversity Exchange interviewed Scott Chan of CalSTRS at the SohnX San Francisco Conference. They talked about tech stocks, how CalSTRS sees the investment landscape and more.
Tech stock valuations are getting high
CalSTRS's Reyes asked Chan about his interest in tech stocks, and he said his interest dates all the way back to the early 1980s with Microsoft and Intel. He said he thought they were going to change the world, and he's been "fascinated" with tech since then because of how much the two companies have grown. He also said tech "can really disrupt and replace industries" and that he's "fascinated" by that.
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She also asked him about his personal portfolio, including investments he isn't interested in. He said he's "a little worried about tech valuations." Although much of his personal stock portfolio has run up, he said it's tailer-made for the current environment because he owns a lot of tech names.
He added that some of his favorite stocks are e-commerce names in emerging markets, such as Mercado Libre and Lima Limited. And he believes such companies will be the future Amazon, eBay and PayPal of the world, so he sees a lot of growth left in them. CalSTRS has also tapped into ecommerce companies in emerging markets, and not just in their stocks.
"One of our hot sectors or segments is building out the logistics and distribution of these ecommerce companies," he added. "And essentially, if you were to buy, I think this real estate market could be highly valued, but we're building it. And I think building has a different profit proposition as a decent spread between building it to core and then selling it to others and or keep it in our portfolio."
How CalSTRS sees the investment landscape
Reyes asked Chan how CalSTRS sees the current investment landscape, and he said "it's been a wild ride." He noted that interest rates are low, which leads to lower returns, and opportunities are narrow right now.
"Right now we're in a position, if you were to say we're going to be in a deep recession, that valuations would be as high as they are, I would say you're crazy, but they are," he said. "And so, what we're seeing is a very narrow opportunity set, perhaps more narrow than when the crisis began. And that's unusual. Because usually in a recession, you have deep discounts, and you have the ability to find great opportunities. And so right now, our portfolio positioning is what we term inside CalSTRS 'aggressively neutral.' The markets likely to be volatile going forward."
He also said they are "right on top" of their asset allocation targets and that they're not taking on a lot of risk outside their asset allocation. Further, he said the pension fund is trying to bring more of its assets internally to save costs and increase returns by trading stocks and fixed-income bonds themselves. He also talked about their partnerships in private markets.
"Essentially, we're teaming up with private equity partners, real estate partners, infrastructure, partners, etc.," he explained "Ultimately, we think that we can save roughly two to $300 million in costs over the next five to 10 years on an annual basis. And so we've really been focused on that. One area, I think that we've been investing in the cloud model recently, is in the area of private credit. That's a small sliver of CalSTRS, less than 2% today. But if I had a crystal ball, I'd say that we're likely to grow that bond allocation based on all the opportunities we're seeing across the different asset classes, including innovation, private equity, real estate infrastructure. We've seen a lot of opportunity there right now."
She also asked him for leadership advice on how to lead a successful investment organization. He said having a strong team is the key to success.
"I think as being a leader, it's really a, it's a great responsibility," he said. "It's been a humbling experience for me, and one where I think you're constantly learning. CalSTRS is in such a large and complex place. And so you really can't go it alone. So to me, it's about listening to my, to my staff and getting all their input. I'd say one of the dramatic changes in my life and career was when I really learned how to listen, instead of trying to solve problems all the time. But I think more importantly, you need to build trust, even with your staff, and be authentic, and, and transparent."
He also advised leaders to build the best team and spend a lot of time supporting them. He said he has a great team at CalSTRS, so that makes his job much easier.
This article first appeared on ValueWalk Premium.