Investing in 2022 Will Be More Challenging, CalSTRS’ Ailman Says

(Bloomberg) -- The second-largest U.S. public pension fund's chief investment officer is looking back at 2021's lucrative environment with a touch of pessimism about what's next.

“It's going to be a challenging year,” said Chris Ailman of the California State Teachers' Retirement System in a Bloomberg Television interview Friday. The S&P 500 probably won't come anywhere close to matching the 27% advance it clocked in the past 12 months, he said. “Historically, I'd expect a very low single-digit year.”

Returns typically lag after a few boom years, and the likelihood of a U.S. recession increases if rising inflation spurs the Federal Reserve to tighten monetary policy, Ailman said.

Diversifying portfolios is difficult because of low bond yields and uncertainty in real estate, with office buildings and malls lacking tenants, he said.

CalSTRS, which had $320 billion as of Nov. 30, will earn about 15% in calendar 2021, Ailman said. The pension had a net investing return of 27% in the fiscal year ending June 30, up from a 3.8% return in fiscal 2020. Its average annual assumed rate of return is 7%. The pension averaged 7.6% annual returns for the 20 years under Ailman, who became CIO in October 2000.

Extreme weather events such as this week's Colorado wildfire shows yet again why climate change is becoming a growing consideration for investors, he said. That underscores why the fund has been pushing for change at the likes of Exxon Mobil Corp.

The company needs to embrace new board members and pivot from oil and gas to a broader array of energy sources, Ailman said. If it fails to do so, it risks becoming an Eastman Kodak or Blockbuster Video.

CalSTRS Says Exxon in Danger of Being Next Blockbuster, Kodak

Energy innovation, he said, “is going to bring some alpha opportunities that big tech is trying to get ahead of and solve.”