September 12, 2013 / 8:19 PM / 4 years ago

No. 2 U.S. pension fund CalSTRS picks Hermes as commodities manager

NEW YORK (Reuters) - The California State Teachers’ Retirement System said it has picked Hermes Fund Managers to be one of its two commodity managers, the first major step toward realizing the portfolio approved three years ago as an inflation hedge.

CalSTRS, the second largest U.S. pension fund with about $150 billion in assets, had considered a $2.5 billion allocation when it first studied a foray into commodity markets in 2010. It eventually settled on a portfolio of $150 million.

Since then, it had looked for two managers to run the investment.

“We have one identified - Hermes,” CalSTRS spokesman Ricardo Duran told Reuters in an email on Thursday.

“We are not ready to announce a second manager,” he said, without elaborating.

Hermes Fund Managers was not immediately available to comment. On its website, the company said it has been managing commodity mandates for institutional investors since 2005, and that it co-invests with its clients.

In July, Duran explained that CalSTRS’ commodities plan had progressed slowly over the past three years due to tame inflation levels.

“The policy objective was for it to be a hedge on inflation, and since inflation has been at a manageable level the emphasis was on finding the right managers,” he said in an email then.

U.S. inflation readings have stayed benign the past two years despite aggressive monetary easing by the Federal Reserve to stimulate the economy, data from Thomson Reuters showed.

Prices of key commodities other than crude oil have fallen since the end of 2010, despite some hitting record highs.

CalSTRS is not the only pension fund to have scaled back its plans for commodities.

The No. 1 U.S. pension plan, the $260 billion California Public Employees’ Retirement System, or CalPERS, switched most of its commodity holdings to inflation-protected bonds last year after six years of mostly poor returns.

Some pension plans have had a more positive view of commodities. Maryland’s $42 billion state pension approved a $50 million allocation in June for a commodities hedge fund, its fifth such allocation in 18 months.

CalSTRS’ commodities portfolio falls under a broader “Innovation & Risk” portfolio. In March, the pension fund asked candidates for the commodity manager positions to propose derivative trading strategies that had a long bias and maximum short exposure of 40 percent of gross capital.

Hermes, on its website, listed its two strategies for commodities: The “Index Plus” which makes active long-only bets on higher commodity prices, and the “Absolute Return” which is neutral on market direction.

The Index Plus aims to outperform its benchmark, the S&P GSCI Light Energy Total Return Index, by 3 percent per year. The Absolute Return Strategy follows the Dow Jones UBS Total Return Commodity Index and is benchmarked to the three-month U.S. Treasury bill.

Editing by Jim Marshall

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