How I Invest with David Weisburd
E142: How to Generate Alpha on $350 Billion w/CIO of CalSTRS Scott Chan
Tue, 04 Mar 2025
In this episode of How I Invest, I have a conversation with Scott Chan, Chief Investment Officer of CalSTRS, to explore how he oversees a staggering $350 billion in assets. Scott shares insights on CalSTRS’ collaborative investment model, their approach to private and public markets, and why they aim to be the "global partner of choice." We also discuss the importance of structural alpha, liquidity management, and identifying long-term supply-demand imbalances.
Chapter 1: How does managing $350 billion provide advantages and challenges?
You manage 350 billion or over a third of a trillion dollars, kind of a crazy number. In what way is your capital base an advantage? In what way is it a disadvantage?
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.
Scott, I've been excited to chat. Welcome to the podcast.
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.
Thank you, Scott. So how does one go about investing $350 billion?
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.
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Chapter 2: What is the CalSTRS collaborative model?
I think that really helps to have a prepared mind, to have a plan that's ready, even though you know that everything's going to be different the next time we go through it. You and I, we won't be able to guess what the cause of that crisis is, and you realize certain things become more dislocated and more interesting in terms of a pricing perspective than others.
You won't be able to guess that either until it actually happens.
Implicit to this is CalSTRS seems to have a very flexible governance structure that you're able to move very quickly on opportunities. Talk to me about your governance.
This is a really interesting point, David. To me, if I looked globally at all the different asset allocators, and certainly over my lifetime, one of the biggest changes has been global competition, right? I mean, you think about CalSTRS, $350 billion in assets.
We're now like, and I don't know the exact number, I stopped checking this, but at a certain point we were like 25 on the list of global allocators in terms of size, right? The other big trend is every asset allocator has become more and more like an asset manager. The staff has become more and more professional to different degrees.
But I think what differentiates, one of the things that differentiates all the global allocators and one of the advantages we have is great governance. That starts with our board and you need a board that's innovative and that's able to delegate and be strategic with staff. We have that, and they delegated the authority of the investment decisions, how we have flexibility to react to the markets.
We do that by policy. They approve the policy. We've got great governance, starting with the board. But then from staff's perspective, I think one of the things that has made us really successful is how we invest, how you make money, I believe, given my experiences in the market,
bottom up it's transaction by transaction and that can only be done through a building expertise across all these different segments in the market um which we've done to you know to mirror our partners as well i think those have been really keys and then we've delegated the authority um down to that level you know people that have the greatest insight into the assets
And I would say 80% of our transactions work this way. They go into the division, is it private equity? Is it real estate? Is it fill in the blank? And they decide. They have a mature investment committee and they decide. And they can decide quickly, which has made us very dynamic in the marketplace.
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