(music) Hi and welcome to Inside CalSTRS Investments. A series of discussions on how CalSTRS invests for the benefit of California educators. I’m Mindy Selby and I’m here today with Chris Ailman, CalSTRS Chief Investment Officer. Thanks for being here today, Chris. You bet, good to be here with you, Mindy. In our last episode, Chris, you talked about how CalSTRS is embarking on an asset liability management study. What does that term mean? Yeah, asset liability management study. It really is a time where we’re backing up. First we’re taking a look at our liabilities. How long teachers live. What kind of income increase in their income they get while they work. And then we’re also taking a look at our assets. How much money do we have and how should we plan to invest it. So it’s the combination of those two parts. So it really is a matter of stepping back and looking at the big picture. Chris, I’ve heard that asset allocation is the single most important decision that a Board of Trustees can make for a pension. Why is that? It really is. It’s amazing and we constantly drive home that point to them that the Investment Committee makes lots of decisions during the years, but nothing is more important than this one. And the reason is that that asset mix they pick actually explains over 90 percent of our investment return. So I could look at a teacher and or somebody else in the marketplace and compare their return to ours and their asset allocation choice, not the individual investments, just how they lump their money, is actually going to explain 90 percent of that return. So it is very profound. You know, we work really hard to make a lot of decisions and add value, but we’re really impacting only about 10 percent of that return. Are investment returns really that critical? Some say that it’s the taxpayers that keep the fund afloat. Mindy, when you think about a retirement fund, it really is a bucket with benefits coming out the bottom and there’s only two spigots coming in. Two sources. One is going to be contributions which is from the taxpayers and it is critical. You have to contribute in. But the other is investment returns. And the goal is we’re gonna be investing that money for the life of a teacher. Probably 30 years over their career, plus their time period in retirement. So if you’re an individual and you step back and you think about personally saving for retirement on your own. I often emphasize the first important step is starting early and contributing. That’s the whole key is putting money to work. We’ll take it for the time value of that money extending it out over a long period of time and compounding it. So the investment return is important from a compounding standpoint, but the key for us is time. How can members best explain the asset liability management study to friends and family members? It is complex and I get it. We get a lot of people involved in it, but if they really look at it they would turn to their family or their friends and say “It’s financial planning.” The Board and the staff are sitting down and looking at how much money they owe in the future, how much money are they going to get in and how to invest it. So it literally is a just a financial plan for the next 30 years. How can members – or people of the public – see what’s happening with the ALM study? Great question, Mindy. They can look at the website. And we’re gonna have a section in the investment tabs that really just focuses right in on the study. Now there’ll be an agenda item in almost every Investment Committee meeting and you could look at each of those, but there’s also a whole series of reports that go to the Retirement Board in that meeting from the actuaries. And it’s really part one and part two, so they really dovetail together nicely. We’ll try to put all that information together so that people can read it in one spot and kind of see what are we saying about the liabilities and then how are we discussing it when it comes to the investments and what kind of returns. It’s complex material, but we really have PowerPoints and a lot of information in there and it’s a step-by-step approach over time. And when will the study finish? You know, it really – it does take a long time. So it started here in 2019. It’s going to really appear in almost every Investment Committee throughout 2019 and the same thing with the Retirement Board. I expect us to start finishing up really in November of 2019 and then finally wrap it up at the February meeting of 2020. And I think that liability side will be finishing at about the same time period. Well thank you very much, Chris. It’ll be interesting to see how that turns out. You’ve been watching Inside CalSTRS Investments with Chris Ailman. I’m Mindi Selby and thanks for watching.