Scott Chan
speaker
125 appearances
1 recordings
1 series
first heard Mar 2025
last heard Mar 2025
Scott Chan’s voice in public audio — every appearance, attributed to the second.
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That's a great question. It's two sides of the same coin here. One thing that we've talked about is we just have a very long-term horizon. You're labeling me as contrarian. I think thinking long-term gives you the capability to be contrarian. because most of what you're seeing in the short term is noise. So that's number one.
Number two, the way you make money with a high degree of probability is bottom up, transaction by transaction, deal by deal. And so our sites gives us the capability to build an expertise, expert team across markets, which is not typical for an organization of our size, is create a nimble and dynamic decision-making structure at the division level. That's something that's unique.
The second thing is scale economics. Some of the transactions we can negotiate from a collaborative model perspective is the scale. If we're going to be a significant size, it just aids us being able to negotiate better win-wins with our partners.
Thank you. No, thanks for having me. This is really exciting. And you've done a great job with your podcast. I'm so excited to be here, David.
Let me just talk about the CalSTRS collaborative model, which is our primary way of how we implement our investment strategy. So if I were just to step back and define what is the collaborative model for your audience, for CalSTRS, that's an investment strategy to bring more of our assets in-house to lower costs, increase alpha, or control our risk better.
or to leverage our partners in the private markets to achieve similar benefits. You think about public markets versus private markets here at CalSTRS. In the public markets, for example, in global equities and fixed income, we have roughly 80% to 85% of our assets managed by our own internal team from trading to portfolio management and anything in between.
And these areas have consistently beat the markets. We take a little bit of active risk, sort of enhanced active is what we call it. And some fixed income, call it 30 basis points a year, we generate an alpha. In global equity, that's become more significant. It's around 50 basis points a year or so.
But in the private markets, we don't think we have the capacity to build our own internal, for example, Blackstone or Apollo or Carlisle, fill in the blank. And so what we try to do is become the global partner of choice.
And so that's a defining characteristic of our cloud model is trying to become a global partner of choice. You might ask yourself, well, why is that important? Because we strive, David, to be one of the top three calls for any of our partners. If we do, then we're going to be successful in accessing the best transactions globally.
So you can think about it'd be easy for us at 350 billion or so in assets on our management to be a one way street where all these asset managers, they come to us on the private market side or the alternative side. And we say yes or no to invest in any of their funds as an LP. But because we have 350 billion in capital invest, I want to transform that traditional dynamic.
And so it's important for us to do this because, number one, the best investors in the world, they can also select their partners, right? They have a certain amount of capacity. And particularly when it comes to the subset of their best transactions, how can we access that?
Number two, it's by putting the best of CalSTRS ideas with the best of our partners' ideas and leveraging that, we find that we can create a lot more value for our over 1 million teachers. And so that's kind of one element of it is becoming the global partner of choice. I think that would be the second kind of main point for the cloud model.
If you think about the essence, the core things that we're trying to achieve is we're trying to provide a value proposition for our partners too. So, you know, number one, I want to be known, I want CalSTRS to be known as having the trusted relationships and expertise that all our partners need. we can help you and together we can solve the complex financing needs of the world.
So my staff needs to be the forefront of the minds of our partners. We need to sort of mirror them in our expertise too. And I think we've been able to show that or demonstrate that. Number two, we need to be nimble and dynamic in the marketplace as well. So if a decision needs to be made, And this doesn't happen often, but if it needs to be made same day, we have to match that capability.
And we do that by delegating a lot of authority to the divisions and giving them the opportunity to have their own investment committees. So we're nimble and dynamic. And the third element is for us to be flexible.
So we don't have this one size fits all model, but we can structure anything depending on what makes sense for the particular transaction or what makes sense for the partner and us together. So we could be flexible. In the limited partnership, we could have a separately managed account that's more bespoke.
We can co-invest, we can do a joint venture, we can share revenues, all the way to owning a minority or majority interest in the asset management. So those things, I think, are at the core of how we execute.
In our public markets, because we have so much capital, we end up being the market. And it's very difficult to deploy the amount of capital we have in a way that we can generate alpha on a consistent basis. And so if you looked at our global equity portfolio as an example, I would say 80% of that is passively managed and maybe 20% of that is actively managed.
And then if you looked at the fixed income side, again, we're sort of enhanced active. So you're right in the sense that we've taken what we think is appropriate risks, but those risks tend to be narrow. And we've shifted a lot more of our risk budget, so to speak, as an organization into the private markets where we think the probability of generating alpha or greater value add is a lot higher.
And over the years, if you looked at the trends of the last couple of decades, we've shifted roughly 44% of our asset allocation into the private markets and the alternative assets. That's not only diversified the portfolio, but what you're alluding to, an alpha generator for CalSTRS.
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