E142: How to Generate Alpha on $350 Billion w/CIO of CalSTRS Scott Chan
Digest
Scott Chan, CIO of CalSTRS, a $350 billion fund, details their investment strategy. They utilize a "cloud of model" approach, managing public markets in-house and partnering strategically in private markets to lower costs, increase alpha, and control risk. Their goal is to be the "global partner of choice" for private market GPs. CalSTRS prioritizes collaboration and flexibility in partnerships, as illustrated by their Fairfield Residential case study, where their involvement ranges from LP to majority ownership. Their contrarian approach, enabled by a long-term horizon, involves identifying supply-demand imbalances and potential asset allocation shifts (reducing global equity, increasing infrastructure, energy transition, and private credit). Liquidity management is crucial, with diverse sources (fixed income, hedge funds, cash) prepared for market drawdowns. Lessons from past crises (2008-09 and COVID-19) highlight the importance of liquidity and preparedness. CalSTRS generates structural alpha through strategic deal structuring and operational risk mitigation, leveraging team expertise and collaboration. Their flexible governance structure allows for agile responses to market opportunities. The podcast concludes by emphasizing CalSTRS's team and culture as key competitive advantages.
Outlines
CalSTRS's Investment Strategy and Scale
Introduction to CalSTRS ($350 billion) and their investment approach, focusing on in-house public market management and strategic private market partnerships ("cloud of model") to enhance returns and manage risk.
Partnering with Private Market Managers
Details on CalSTRS's ideal partnerships with private market managers, emphasizing collaboration, flexibility, and a range of involvement (LP to majority ownership), illustrated by the Fairfield Residential case study.
Contrarian Investing and Market Outlook
Explanation of CalSTRS's contrarian investment approach, driven by their long-term horizon, and their outlook for 2025, including potential asset allocation shifts (reduced global equity, increased infrastructure, energy transition, and private credit).
Liquidity, Crisis Preparedness, and Governance
Discussion of CalSTRS's liquidity management, crisis preparedness strategies, lessons learned from past crises, and their flexible governance structure enabling agile responses to market changes. This includes discussion of structural alpha generation and the importance of team expertise.
Keywords
Cloud of Model
CalSTRS's investment strategy combining in-house public market management and strategic private market partnerships for enhanced returns and risk management.
Structural Alpha
Alpha generated through strategic deal structuring and operational risk mitigation, leveraging expertise for cost savings and enhanced returns.
Contrarian Investing
Investment approach opposing prevailing market sentiment, benefiting from long-term perspectives and identifying undervalued assets.
Liquidity Management
Strategic management of readily available assets to capitalize on opportunities during market downturns.
CalSTRS
California State Teachers' Retirement System, a large public pension fund.
Private Market Partnerships
Strategic collaborations with private market general partners (GPs) for access to superior investment opportunities.
Flexible Governance
A governance structure enabling quick and adaptable decision-making in response to market changes.
Asset Allocation
Strategic distribution of investments across different asset classes.
Infrastructure Investment
Investment in infrastructure projects such as transportation, energy, and utilities.
Energy Transition
Investments in renewable energy and other technologies supporting the transition to a low-carbon economy.
Q&A
What is the "cloud of model" investment strategy?
A strategy combining in-house public market management with strategic private market partnerships for better risk-adjusted returns.
How does CalSTRS generate structural alpha?
Through strategic deal structuring, operational risk mitigation, and leveraging team expertise.
How does CalSTRS prepare for market crises?
By prioritizing liquidity management and having a prepared plan, while recognizing the unique nature of each crisis.
What are key characteristics CalSTRS seeks in a GP?
Competitive advantage, shared value creation, aligned long-term investment principles, and a collaborative approach.
How does CalSTRS's long-term horizon and flexible governance contribute to success?
The long-term horizon allows for contrarian strategies, while flexible governance enables agile responses to market opportunities.
Show Notes
Highlights:
The Collaborative Model: How CalSTRS brings more assets in-house to lower costs and increase control over risk and alpha.
Public vs. Private Markets: Why 80–85% of public market assets are managed internally while private investments rely on partnerships.
Becoming the Global Partner of Choice: Why being a top three call for GPs is crucial for accessing the best private market transactions.
Portfolio Allocation Strategy: How CalSTRS is shifting risk exposure toward private markets to enhance returns.
Contrarian Investing: Scott’s view on why the stock market may underperform over the next decade and where he sees better opportunities.
The Importance of Liquidity: Why liquidity will be "more valuable than gold" and how CalSTRS prepares for market downturns.
Identifying Supply-Demand Imbalances: Where CalSTRS sees long-term opportunities, from real estate to private credit and infrastructure.
Structural Alpha: How CalSTRS structures deals to generate uncorrelated alpha without taking additional market risk.
Governance and Decision-Making: How a nimble, delegated investment approach allows CalSTRS to act quickly on opportunities.
The Role of Team & Culture: Scott emphasizes why a strong leadership team is the ultimate competitive advantage.
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Guest Bio:
Scott Chan is the Chief Investment Officer of CalSTRS, overseeing $350 billion in assets for over one million California teachers. With decades of experience in institutional investing, Scott has led CalSTRS in developing its collaborative investment model, focusing on cost efficiency, structural alpha, and strategic partnerships. His contrarian mindset and deep expertise help position CalSTRS as a global leader in asset management.
Our Podcast now receives more than 200,000 downloads a month. Are you interested in sponsoring an episode? Please email David Weisburd at dweisburd@gmail.com.
We’d like to thank @JuniperSquare for sponsoring this episode!
#VentureCapital #VC #Startups #OpenLP #AssetManagement
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Sponsor:
Juniper Square is dedicated to transforming the private markets investing experience. The company provides a full range of modern, connected fund technologies and services for over 2,100 private markets GPs across fundraising, reporting, fund administration, treasury, compliance, and business intelligence. Today, over $1 trillion of assets and 600,000+ LP accounts are managed through Juniper Square software and fund administration services. Learn more at www.junipersquare.com.
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Stay Connected: X / Twitter:
David Weisburd: @dweisburd
LinkedIn:
David Weisburd: https://www.linkedin.com/in/dweisburd/
Scott Chan: https://www.linkedin.com/in/chanscott/
Links:
CalSTRS: https://www.calstrs.com/
Questions or topics you want us to discuss on How I Invest? Email us at dweisburd@gmail.com.
(0:00 ) Episode preview
(1:09 ) Introduction to CalSTRS and collaborative investing
(2:11 ) Public vs private markets and global partnerships at CalSTRS
(5:26 ) Public and private market investment strategies
(7:03 ) Collaborating with private managers and selecting GPs
(11:41 ) Contrarian thinking and current investment focus
(17:13 ) Liquidity management and market opportunities
(18:19 ) Sponsor: Juniper Square
(19:43 ) Liquidity options and alternative asset opportunities
(21:31 ) Market crisis preparation and governance structure
(26:30 ) Exploring structural alpha and capital base implications
(31:20 ) Leveraging supply-demand imbalances in investing
(35:58 ) Personal alignment and development as a CIO
(40:29 ) Closing remarks
Table of contents
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