The nation's second-largest pension fund is considering a significant shift away from some stocks and bonds amid turbulent markets world-wide, one of the most aggressive moves yet by a major retirement system to protect itself against another downturn.

Top investment officers of the California State Teachers' Retirement System have discussed moving as much as $20 billion, or 12% of the fund's portfolio, into U.S. Treasurys, hedge funds and other complex investments that they hope will perform well if markets tumble, according to public documents and people close to the fund.

The board of the $191 billion system, which is known by its abbreviation Calstrs, is expected to discuss the proposal at a meeting later today in West Sacramento, Calif. A final decision won't be made until November.

The new tactic—called "Risk-Mitigating Strategies" in Calstrs documents posted on its website—was under discussion for several months as the fund prepared for a scheduled three-year review of how it invests assets for nearly 880,000 active and retired school employees. But the recent volatility around the world has provided a fresh reminder of how exposed Calstrs' investments are when markets swoon.

Pension funds across the U.S. are wrestling with how much risk to take as they look to fulfill mounting obligations to retirees, and the fortunes of most are still heavily linked with the ebbs and flows of the global markets despite efforts to diversify their investments. State pension plans have nearly three-quarters, or 72%, of their holdings in stocks and bonds, according to Wilshire Consulting.

Calstrs' proposed moves differ from a strategy unfolding roughly a mile away at the California Public Employees' Retirement System, which is the nation's largest public pension fund. That Sacramento-based system, known by its abbreviation Calpers, decided last year to exit all hedge-fund investments. Other pensions seeking to become more conservative have beefed up stakes in bonds or international stocks.

Calstrs Chief Investment Officer Christopher Ailman said in an interview he hopes the potential shift could help stub out heavy losses during gyrations because the investments don't generally track as closely with market swings.

The Calstrs documents propose a range of potential amounts that could be devoted to the new "Risk-Mitigating Strategies" investment category, from zero percent to 12%. In addition to Treasury bonds and hedge funds, the new holdings could include so-called liquid-alternative funds that mimic hedge-fund strategies, according to people close to the fund.

"I'll equate this to the cost of insurance," Mr. Ailman said. "It's the idea of adding more of a hedging asset class into the portfolio."

Calstrs has not made any major moves in recent weeks amid the turmoil in China and the U.S. markets. Mr. Ailman said he knew there would be turbulence after Asian markets tumbled last month, but he said Calstrs chose to stay put because it views itself as a long-term investor and because its largess means it has limited countermoves when stock prices fall.

Write to Timothy W. Martin at timothy.martin@wsj.com

 

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(END) Dow Jones Newswires

September 02, 2015 14:05 ET (18:05 GMT)

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