Calstrs CIO Who Runs $318 Billion Pension to Step Down in June

“It’s time for a transition for me, for Calstrs,” Ailman said Thursday in an interview with Bloomberg Television. “I’ve been a public funds CIO for 38 years, but I’m ready to retire. I’m ready to slow down.” 

Ailman, 65, who joined Calstrs in 2000 from Washington’s state public pension fund, said he would stay on as an adviser through the end of the year to help with a smooth transition to the next CIO. The pension fund, one of the oldest in the country, manages about $318 billion for 965,000 educators and their families. 

The move leaves the two largest pension funds in the country, both in California, searching for new CIOs simultaneously. The California Public Employees’ Retirement System is still looking to replace Nicole Musicco after her abrupt exit in September. Calpers said it hopes to hire a replacement early this year, while Calstrs intends to launch a public search in the spring.

Read More: Calpers CIO Musicco to Step Down After Less Than Two Years 

Both Ailman and Musicco sought to import elements of a so-called Canadian investment model, which emphasizes direct investments to reduce the fees paid to outside managers. But Musicco struggled to implement a new strategy during her 18-month tenure, and her attempt to turn the pension into a bold dealmaker irked key investing staff, who felt the strategy lacked clear communication. A Calpers spokesperson called the critiques “water-cooler criticisms” at the time.

Ailman’s push to expand Calstrs’s investment portfolio into private markets through co-investments and joint ventures won him a multi-decade tenure and accolades in the industry, including the first ever lifetime achievement award from Institutional Investor. But it wasn’t entirely a smooth transition. Calstrs lowered its annual return target to 7% from 7.5% in 2017 after missing it for several years. 

“We’re a money-management firm but we’re inside the body of a government entity, which is not the right business model,” Ailman said in the interview. “I have been trying my best to make it work for a long time. These are tough jobs, but very rewarding,” he added, referring to the political pressure and limelight that comes with the public servant role of CIO for a state pension fund. 

Still, the pension has produced an annualized return of 8.2% over the past five years, ahead of its target. In the 2022-2023 fiscal year Calstrs posted a 6.3% net return, after losing 1.3% for the previous fiscal year amid turmoil in the stock and bond markets. 

In recent years, the fund has turned to private equity and private credit to boost returns. The changes have helped Ailman push the fund to meet a goal of being fully funded by 2046. It was 74.4% funded as of June 30. And Calstrs has consistently outperformed Calpers, its neighbor across the Sacramento River, an accomplishment that Ailman often touts. 

When Ailman joined Calstrs, he said he found a small team and a sleepy, simple portfolio. He spent the next quarter-century growing a 3% private equity allocation to more than $45 billion today. It now represents 16% of the overall fund, the second-largest asset class after public equities.

While working on a 10-year strategic plan for the pension’s investment board, Ailman had a realization: Money-management fees were on track to balloon to a peak of $400 million. The board pushed him to think about new ways to invest outside of the traditional partnerships with asset managers. That evolved into making co-investments in private equity, owning operating companies for real estate investments, and joint ventures for infrastructure investments. 

Ailman said the strategy has saved the pension more than $1.6 billion in carried interest and other types of management fees since 2017. 

“That’s return back to us,” Ailman said. “That is alpha.” 

The changes allowed Calstrs to capture more of the profits in its investments than it otherwise would have working in the old model, according to Ailman.

Read More: Calstrs Seeks to Borrow More Than $30 Billion to Manage Cash

His successor may not have the same room to maneuver. Ailman said the landscape is far more complex than when he first started, with geopolitics and climate change affecting the global economy and subsequently the returns of the fund. 

The fund also hears a lot more from stakeholders and vocal retirees, adding to the political pressure of such a position, Ailman said. 

CIOs at state pension funds must walk a fine line, answering to often-quarrelsome large boards, with members that aren’t shy about going public with their views. At the same time, they must navigate the sometimes-conflicting viewpoints of politicians and career staffers over how to provide for the retirement of the state’s public workers. 

Ailman’s advice, gleaned from his father, to the next CIO: “Hire the right people, get them the right resources they need, give them a mission, a vision and then get out of their way.”

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