Investing Billions - E357: CalSTRS CIO: Where Do You Invest $390 Billion Today?

Episode Date: April 28, 2026

What if the biggest edge in managing $390 billion isn’t picking assets—but controlling risk and liquidity when markets break? In this episode, I sit down with Scott Chan, Chief Investment Officer of CalSTRS, to discuss how one of the largest institutional investors in the world is positioning for a period of massive structural change. Scott breaks down how AI, deglobalization, and the energy transition are driving a multi-decade investment cycle, why traditional diversification is breaking down, and how liquidity and dynamic allocation become critical in volatile markets. We also explore structural alpha, co-investing at scale, and how governance and partnerships enable CalSTRS to generate returns without taking incremental market risk.

Scott, you're the CIO of Calsters, which has 390 billion assets under management as of last calendar year. And last time we chatted, you said that you were positioned in a very interesting place as an organization, take advantage of AI revolution. What did you mean about that? AI hugely transformative, right? It can transform virtually every company, sector, industry, even countries with that technology. but if that weren't enough in and of itself, we're living in a multipolar world, meaning that countries more and more are doing what benefits them the most, right?

And so that is changing and rewriting the supply chain, de-globalization. Many countries are spending more on defense. We're also on the path net zero. And so there's an awful lot of investment that needs to go in decarbonizing energy and moving the world to net zero. And so, I mean,

what strings all these things? together is a tremendous fixed asset spending boom that is going to be a dominant theme alongside this transformation with the technology in AI. You talk about uncertainty, and that sounds like a negative, but sometimes patient capital, when positioned correctly, could take advantage of uncertainty. Is Calster's position to take advantage of this uncertainty? And if so, in what way? You're exactly right.

If we think about this tremendous transformation and tremendous uncertainty, I think the keys for Calcers to be successful for number one, to create greater diversification in our portfolio construction, to be more dynamic in our asset allocation. And the third, liquidity management, roughly half of our portfolios in private markets. So it'll be crucial for us to be able to manage our liquidity. And what I mean by that is when the markets are down 30, 40, 50%, 50%, we want to make sure that we have the type of liquidity where we can be providing capital when others are not. And that's when we at the best discounts in the market. What does it mean to position $390 billion defensively?

I ask myself and my team two questions. Is there a better way for us to construct the portfolio and thinking about the beta risks that we're taking? And the answer is yes, and I think in a more dynamic, more diversified way, number one. And then the second component of that would be, well, how can we do better in generating more value or alpha in sourcing, selection, we're structuring?

So it's really the one fun approach is two parts. I think your question around ABF, it moves into this first element of if we think about the tremendous opportunities and risks that are happening with this transformation on uncertainty, how are we going to position the portfolio more dynamically across the different beta risk? And I would say that for us, what we're moving into, you know, as we think about this higher correlation between bonds and stocks, we have to be thinking about how can we truly then diversify our portfolio if our fixed income portfolio becomes more correlated to our growth portfolio.

There's a tremendous fixed asset boom that we see going forward in energy, energy transition, power, because it has to, you know, you need the energy and the power for all of those areas of increased manufacturing, AI, the data centers, defense spending, you name it, right? But also it's infrastructure writ large because as you think about more of that, happening within our country or every country that needs to be transported through, you know, rail and all these different mechanisms. And so we see a large opportunity there. The former CIO of Northern Trust Thomas Wayne, and one of the things that they figured out is as investors were chasing more returns from their 6040 portfolio, they kept on wanting to

return more and more on the bonds, aka, they kept on wanting to get into risk and riskier bonds when Michael Milken called junk bonds or coined that term in the 80s. And then, lo and behold, if you do that to an extreme, you end up with 100% correlation. So you end up with a 6040 portfolio that is as risky as 100, zero portfolio, but just returns lower. So this idea of just doing 6040 or just pushing the envelope and certain sub asset classes could end up being actually inferior than even the most traditional, even a non-diversified portfolio.

Absolutely. And that's why we're very selected when we think about private credit, the sub-sectors of it, because it's a wide space. There's some that areas of private credit that are definitely more diversifying to KELSTERS and others. I think ABF, for example, in infrastructure or two of them. But we're also very selective in who we partner with. We do think there will be a credit default cycle. And then it boils down to, you know, what is the default going to be and what are the recovery is going to be with our partners. The other element that we're very careful to do, and this was something that was part of our efforts,

and we've talked about this past with the Clavid model, that we very much want to control the risks and the structures, and having more control gives us more opportunity to pivot at the right times. So that's an element. But to your theme of thinking about how you can really truly diversify the portfolio, what's correlated, what's not, we also are increasing our footprint in uncorrelated assets. And so these are, you know, elements that are part of our risk-mitigating strategies portfolio. We have hedge fund-like strategies within that area, and we think that it's going to be a good time to flow into that.

Again, if we think there's going to be a higher correlation between stocks and bonds, you know, infrastructure, private credit, uncorrelated assets. The other area that I think is going to become less correlated over time is just regional diversification. So if you think about the globalization era that we've been in, we saw a lot of correlation amongst countries, but I think that's going to diverge. Is that because everybody was trading with everybody and it was essentially just one big country? If you just looked at the U.S. companies, they had supply chains within all the other countries. Their revenues were being earned globally. But as every country now is starting to diverge in terms of their monetary policy, in terms of their own.

countries and initiatives. I think there'll be less correlation and I think there's there's going to be a greater opportunity to to diversify regionally. Expert calls have always been one of the most powerful ways to build conviction, but today investors are asked to cover more companies, move faster, and do it with leaner teams. With Alpha Sense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer, purpose-built and knowledgeable-based information to conduct high-quality context-stretched conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. Your call transcripts flow natively into your Alpha-Sense experience and become querable,

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Learn more at Alpha-sense.com. how I invest. It's fascinating point because if you take a step back and think some countries are going to make investments into some sectors, some companies are going to take some on different monetary policies than everybody else, some are going to be more west-centered, some are going to be east-centered, some are going to be in different political blocks. Downstream of that, these policies have consequences, not just political, their economic consequences. And you could diversify away from these policy decisions and build more diversification just by going global. We've talked about diversification.

I still think that it's going to be very important to take advantage of this transformation in AI and technology. We'll do that through our growth portfolio through global equities and private equity. I think we're going to maintain that, but diversify the portfolio in some of these areas. You mentioned earlier, retail, sovereign wealth funds, all these new pools of capital coming on board. Do you worry that some of these assets might be overbought and some assets might not even be worth? investing? That will happen, right? As more capital is moving in and you've got to be attuned to the

cycle. One of the things that I think we do well here is price assets. I mean, that's, that's nature of what we do. And so if I think- You guys have insourced that. We have insourced a lot of it or we have developed strategic partnerships across our set to be able to assess that in better and better ways. But if I look at the second part of our one fund approach, it's really about how can we source, select, and structure the best asset deals that we can across the platform globally, across any different type of asset class. And so part of this journey began with the collaborative model, which was our efforts to bring more of our assets in-house directly. And so today, call it 85% or more than 85% of what we do in the public markets we do internally. If I looked at

the private markets, we didn't think that we had the governance structure to build our own internal, you know, Black's Tome, KKR Apollo. And so we would rather become the partner of choice and try to achieve similar benefits of lowering the costs, controlling our risks, and essentially developing more of value or alpha with these partnerships. And so there are a lot of lessons learned there that are informing our approach for the one fund. And I just highlight three of those lessons. The first lesson is that we didn't really have a track record of generating value above our benchmarks. Today, I can say we do. So if I looked at the last five years, fiscal years, we generated about 9.4% returns per year with about 76 basis points of alpha or 76 basis

points above our benchmark returns. And so how did we do that? I think one of the lessons learned with the Cloud remodel was that the majority of that was actually the sourcing and the selection, not the cost savings. And today I can say, hey, we saved over $2 billion of fees, In the last year of record, we estimated 550 million of annualized savings in the last, you know, sort of year of record. But the vast majority of that benchmark meaning came from the team's expertise, their ability to source and select better managers or better transactions directly. And so how did they do that if we looked at the major areas? One was just this idea of partnering with them being very opening, whether it be, SMAs or co-investments or, you know, direct investments or joint ventures or even outright

ownership of asset management firms, that will continue. Another area is what we call adjacencies. And so one of the things that we did well with our partners, and I think we need to do more and be more systematic, is that CalSTERS has been good at identifying the next, you know, sort of large, scalable market with our partners. And so the earlier that we've partnered with them or joined venture with them when they've moved into new areas, we've made it, you know, create a determinants amount of value for our teachers on that basis. It's a way to answer somewhat of a riddle, which is how do you invest a lot of money

and have alpha and not be adversely selected? And one of the answers is you go early and you partner with someone. You put them into a new business line or a new business. And that way you could kind of sustain that alpha without being adversely selected. Absolutely. You know, and it's partnering with them in an unsposed way, as we mentioned. And the other area that, that we learned is what we're calling, or terming platforms. And so because we deploy so much capital in an area, owning part of that organization or even developing revenue shares, gets us not only in selecting the best assets,

but it gives us an advantage in terms of sourcing with that partner, but we also partake in the growth. So if we think about this larger supply moving into the private markets an alternative space, if we're able to acre and also develop businesses, businesses together or platforms, then we're also partaking not only in the sourcing and selection, but also the growth of that entity. So another way, the best way to be aligned with the general partners to essentially be a part of the general partner.

Exactly, yeah. And so those were two of the components, the cost savings and the alpha generation. One thing that I think will become incredibly important as we move forward in this next decade is control. And by that I mean risk control. And so if I look at the public markets, I mentioned, we have 85% plus direct investment control over those assets. Through our partnerships and these bespoke investments, 65% of our private markets, we estimate that we have that control of risk. What does that mean? If we think about all these transformations, just take AI as one of them.

Is a company going to win or is it going to lose share based on this transformation in technology? That kind of disruption within a 10-year time horizon, today I can't imagine a person that could say with accuracy, who's going to win and who's going to lose, right? And so you need more control to be able to pivot or be more dynamic. And that's what I'm saying is think about it as an option. An option becomes valuable when the environment becomes more volatile. And then you need to strike that option. Especially today, there's this V-shaped recovery. Some of the best trading days are a week or two weeks after the worst trading days.

And if you're illiquid, if you're gated up for a quarter or two quarters, you're going to miss, you're going to get the downside, but you're not going to be able to deploy and rotate in. So it's an underappreciated aspect until you've gone through a crisis and you're like, Well, what was I supposed to do? I can definitively speak about right now the cost savings and the alpha of the value creation. This third element, there's going to be a time when I start to speak about it because it's going to becoming increasingly important, this idea of controlling risk within an environment that is changing so dynamically.

I want to double click on your fees. I got to interview Steve Kaplan from University of Chicago and he has this Kaplan Shore Index. He answered the question, what is the equivalent of a 2 and 20? if you were investing into long-only hedge fund. And on average, it's roughly a 6%, 600 basis points per year. And if you think about that in the public markets, that's just an amazing amount of fees if a great manager might outperform by 100 or 200 basis points.

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So it is another riddle, which is how did Calsters last year, you guys returned 13%. How in the world do you do that on $390 billion? And the answer to that is structural alpha. How do you use your capital in order to drive down fees? And to some people,

driving down fees doesn't sound interesting or it's not intellectually stimulating, but dollars and cents, it could have a massive, massive impact. What I loved about how we're implementing our, what you're calling structural alpha, is that we're not taking an additional market risk, right? We're trying to minimize market risk. Essentially, we're taking on more operational risk.

There's more complexity in the structures. And so for us, there was a tremendous buildout in this, not only the investment staff, but the entire organization around how do we manage those increased operational kind of complexity risks around it, but we were able to dedicate. the right resources and focus. And as we think about the future, I think it's the same element. I don't want to take additional market risks. I want to take sort of more complexity, more operational risk to the degree that we're developing structural alpha. And we can mitigate those. It's almost like on one side you have something very easy, but very risky. On the other side,

you have something very hard, but do you risk and you have more control? So you have to pick, do you want to make it very difficult to do internally in terms of processes or do you want to make very risky. We've talked about this in the past. I love the mission here. I'm part of it as my wife has been a teacher for over 30 years and all of her friends are teachers. And so that's, that's in my mind as I think about the difficulty, because it's harder to be a CIO that is essentially trying to push through all this complexity. And there's a lot of change in evolution and getting the staff to move in that direction. But we all do it here, my staff as well as myself, because of the mission. We think if we could fund and secure the retirement for over one million teachers, I mean,

that's, you know, that's something very exciting to wake up to doing that. When I saw your 13% print for last year, I breath, breathe a sigh of relief. I'm like, Scott could go go hang out with his wife and his and her friends and not be worried about being cornered in a brunch or a cocktail party. I always say, I always joke that either Calcers as well or I'm sleeping on the couch and I haven't had to sleep in the couch. So that's good. You're good for a quarter.

So I previously interviewed your predecessor, Chris Ellman. He's awesome. He was in your seat for 23 years. And one of the things I really double-clicked with him on is co-invest and how to do co-invest at scale. We're talking about the structural alpha. Oftentimes firms like Calcers will get zero and zero economics, get really preferred economics. What does work for you in terms of co-invest? And where do you see that evolving for Calcers?

I mean, this was a journey. I remember. I mean, Chris was a great mentor in co-eastern. which still is a great friend. I talked to him often. You know, I've learned so much from him when he was here. One of the first projects that he wanted to meet a lead was the collaborative model. And part of that, a big part of that, was developing this co-investment program.

And so I remember all the way back then, I mean, in private equity, we had something like 2.5% of our portfolio in co-investing. And today, it's north of 25% probably pushing in 35%. But really to develop that, it was all about doing. developing the right experts and Margo Worth and others within the team, they did an amazing job of hiring the right folks to come in with the appropriate expertise. She also did a lot of training with the existing team. It was something that even though it was at 2.5% of the portfolio, it was something we had been doing for a very long time. So we had a lot of internal talent as well. And then being able to take that expertise and really drive that through performance. I mean,

And I think some of the keys for hers is not just sort of one and done, pick five, you know, really significant co-investments, but it was really developing it the hard way, having a diversified portfolio of a lot of co-investments over a long period of time, and they've proven to outperform our LP portion of it. So it's been very, very successful. Those were some of the keys, is making sure that, you know, they're hiring the appropriate experts, setting up the right processes internally in the investment decision. and their investment committees, and then developing a diversified portfolio and one that,

you know, as I look across today, there's sort of different hotspots, but having a diversified portfolio takes us through those challenges. And again, it's been an outperforming part of our portfolio. That is probably the biggest factor of why our private equity has been outperforming as our co-investment portfolio. How much of Calster's Secret Sauce is the governance? A lot of the secret sauce is the governance, and I'm very blessed to have an amazing board who, you know, we've developed over years upon years, trusted relationship, and they've delegated a lot of the investment decision making to staff, virtually all the investment decision making. And so I think that this has been, you know, a great governance structure has created a lot of flexibility, but also has helped us evolve over. time. I mean, they've been there during the build-out of the cloud model. They've been with us through

so many of these elements of our journey. Does that help in recruiting when you're recruiting talent, that governance, that decentralization? Does that help you recruit the best? I think it does because what it enables us to do is we have delegated our authority all the way from the top, all the way down to our investment officers. And I think that's noticeable. And so you have so many people that are owning the decision at the right areas, right? Because you want the person who is on the deals to really have the most ownership. And so we have this very highly delegated model of authority. And so I get involved when the transactions are significantly large or the partnership.

You come into close a deal. Well, I wouldn't say, you know, like, hey, I just come in and close the deals. But I'm just saying that our delegated model works such that there's ownership up and down the chain. And that's what a great governance structure gives you. It's phenomenal for staff to get that experience to come in and be a decision maker as they approach, you know, partners in the market. The partners know that these are the people that they're going to be helping, you know, make the decision rather than, you know, it being asserted by, you know, somebody at the top. What do you think about the evolving space known as venture capital? for us, it's becoming more strategic.

I mean, I think that's one of the most more important things for Calstra's, is I look at the venture community and I look at the growth community. It's sort of now bridging between venture and growth. Why it's strategic is because, again, back to this idea that it's never been more difficult for us to look forward and think where the biggest profit pool is going to be developed over the next 10 years. I mean, part of this is the transformation. And so even me as a CIO, I'm very interested in a, understanding the AI native companies, what large areas are they targeting to try to make more efficient or take over? And so they become more strategic to us because having, you know, direct introductions to follow these AI native companies and understanding the data, you know,

the hype versus the actual reality is becoming more important because as we think about this transformation, we have to, you know, distinguish between the two and then be able to value the underlying companies. Form of information alpha going back a few months ago, if you knew about the software apocalypse, which not only happened in private SaaS companies, happen in the public markets, and I'm sure you had some exposure in the public market. If you knew that ahead of time, you could position your portfolio in such a way to either blunt the damage or even be opportunistic.

Absolutely. Absolutely. AI today is not just technology. It's everything, even to the extreme infrastructure, real estate. How are people going to locate? Where are they going to live in cities if they have easy commutes and if everybody's working remotely? All these downstream consequences of AI and integrated AI, it affects everything. In fact, it's an interesting thought experiment, which is what will AI not disrupt?

And the best answers I've heard are food, baby formulas, things like that. But there's not many great answers to that question of what will AI not change? I think you're right. And I think this is one of the more important elements. to focus on with your private equity partners. A lot of the focus has been on, you know, am I going to get my cash back? When are you going to exit these organizations?

But I think the bigger issue is how are they going to use this technology to transform their own portfolio companies and how are they thinking about their portfolios today? Software being a big example, right, because the private equity industry moved to, you know, call it, you know, a low amount of software exposure to 20 to 30 percent. Today, it's probably down from that given. the valuations. As you look at your private equity partners, how are they going to be using

this from an operational perspective, but then how are they thinking about their own businesses and portfolios? I'm going to ask you to pick from your favorite children, but not literally, but in terms of asset classes. I love them all. I know you're not supposed to pick sub-assic classes or asset classes, but certainly you have some more favor than others. What do you think is undervalued in the market today in terms of asset classes. And where would you like to see more managers and more opportunities? This question was asked when I joined Calsters. And I literally did say I love all the asset classes.

I do think that if I look forward over the next decade, there's just going to be tremendous opportunity in infrastructure writ large. Right. And so that's energy, energy transition power. And that's all the areas that are going to be facilitating. this renaissance in manufacturing, the de-globalization, defense spending, AI, the renewal of the power grid, etc. So I think there's going to be a tremendous opportunity, but it's also a great time to be invested because it's less correlated. Again, I think you get some protection from inflation, which is going to be an issue that could be episodic. And with the higher and more volatile interest rates, I think your bond portfolio is going to be more quality of your stock portfolio.

If I think about the largest growth for Calstra's going forward, it's most likely going to be in infrastructure. Last year, as I mentioned, you returned 13%. And I believe, 360 billion at the beginning of the year, roughly like that. But certainly you made one or two mistakes throughout the year. What were those one or two mistakes? And what's the lessons? One of the mistakes we made is we were thinking that the market was making a mistake. So as we were heading into a change.

in the administration in the beginning of January. We began to position the portfolio defensively because we thought that the threat and the actual movement into tariffs could be dramatically shifting to markets. And so that wasn't being priced in at all. So we began to become underweight equities. We started to move more into bonds

and our uncorrelated assets. And that proved to be right, you know, come February and March. But I think the mistake was not getting, you know, back into the markets quickly enough. And the veracity of the move up, you know, sometime in March and beyond. We did move up with the markets, but I can't say that we took advantage of it in the sense that we began with this head start of making money on the way down. And I think we didn't lose money, you know, overall, but we didn't. get back into the markets as quickly on the way up. Timing is so difficult.

I've interviewed some of the most famous public investors of all time. And the one thing that they all struggle with is what is the catalyst? How do you predict? You're right, quote unquote, right about the stock. But will the market normalize in a year, in two years? How long is it going to take for other investors to figure out the thesis? And it feels like that is more or less unpredictable. It's just something happens.

There's this memetic second order effect in the market. people start covering it and these stocks rise and fall based on fundamentals but catalyzed by something that's almost impossible to predict. I've quoted you many times on a podcast, which you more than anyone that I know, especially at this scale, you institutionalized having a prepared mind for a market correction or a market crash and you figured out how to get the entire organization behind having this prepared mind because it's so underrated because it's so hard to not be reactive when things happen. It's why frankly, militaries have war games and they simulate every single outcome. So when it happens, people don't panic and they know exactly what they need

to do. You've been able to do that. CalCars really better than anyone I've seen. Well, thank you. Yeah, I really appreciate that and credit the staff because I know this. And that was the investment idea of the year in 2021. That was the investment idea of the year was to be ready for the next market crash, which probably has the highest ROI of any investment you could think of. Yeah, absolutely. So we've done a lot, I think, in the guise of liquidity that would put us in position to do that. And that's become part of our total fund management team. So they've been enhancing our liquidity tools. And we've been preparing, you know, for having the appropriate liquidity and cash for those purposes. But then it goes deeper than that, as you know, it's about

the culture and the investment staff all being unified around this. Well, Scott, thanks so much for sitting down with me again and for hosting us here in West Sacramento, you guys have a beautiful campus looking forward to doing this again very soon. Absolutely. It's always a pleasure. Really look forward to speaking to you next. Thank you, Scott.