E296: Former CIO of CalSTRS on Why LPs Overpay for ‘Innovation’

What actually separates great institutional investors from average ones and why does governance matter more than brilliance? In this episode, I talk with Christopher J. Ailman, former Chief Investment Officer of CalSTRS, about the decisions that shaped one of the largest and most successful public pension funds in the world. Chris reflects on more than two decades leading CalSTRS, why asset allocation and governance drive the vast majority of outcomes, and how building a resilient, low-cost, long-term portfolio matters far more than chasing the latest investment trends. We also discuss culture, decentralization, and what CIOs consistently get wrong when managing people and risk.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Chris, I've been very excited to chat. Welcome to How Invest Podcast.

• 0:03Speaker 01

  Thank you. Honored to be here. Enjoy it.

• 0:06David Weisburd?

  You were CIO at CalSTRS for 23 years. Now that you're a little bit removed from that position, what were the key decisions that you made over those 23 years that really shaped the fund and your pool of capital?

• 0:20Speaker 01

  Governance in public funds really does drive return and it drives the CIO and the team. One of the early decisions that board made in literally the 1990s before I got there was to delegate broad authority to run the investment portfolio to the staff. At the time, it was very cutting edge in the States, but they were modeling it after, sure enough, the Canadian model, even though we didn't call it back then. That's what attracted me to the role. The other thing was I knew some of the core of the staff. It was a fairly small team. It was back then, it was a $100 billion fund, only 35 people.

• 0:59Speaker 01

  But I knew that I wanted to take us from kind of a sleepy, small shop to a world-class institution and running a good chunk of the assets in-house. And that's what we achieved over that time period. We, very proud to say that, you know, we moved from the number three to the second largest fund in the USA and I think built a consistent track record of being above median to top quartile among public funds.

• 1:32David Weisburd?

  Today, it's 350 billion. How were you able to achieve above median returns? Is it just siloing and giving the governance to individual teams or was there more to it?

• 1:41Speaker 01

  In any portfolio, asset allocation does really explain close to 90% of the returns. So when I got there, the fund was roughly about a 75, 30, 25 asset to debt mix. Didn't have much in the way of private markets and that was my big push was to, and I told them that when I joined, was to move bigger into private equity, real estate. Down the road came opportunities like infrastructure and private debt much later. But the asset allocation, operating very cost effectively. But when you're a big fund, you're going to hopefully capture the beta of whatever the markets give you any given year.

• 2:26Speaker 01

  Costs are a headwind in that, in a drag and portfolio changes then kick up more transaction costs. So trying to be a steady, long-term investor, I constantly told the staff that, you know, one year is like a mile in a marathon. What we care about is the pace and keeping our eyes on the long term.

• 2:48David Weisburd?

  Unpack that. How were you able to lower costs?

• 2:51Speaker 01

  Britt Harris said it in one of your podcasts, at that scale, you've got the power of negotiation using your size to an advantage when you negotiate, but also by not change chasing the latest, greatest ideas. So often I would see investors go after new ideas here and there that proved to be very, very expensive. And by paying attention to the net cost, we did a lot more passive. We spent the money on active management fees where we thought it made sense. We ran our fixed income in-house. We ran most of our passive equity in-house, very, very low cost. And even back then in private equity, we were trying to negotiate. We didn't really get into co-investments

• 3:34Speaker 01

  until later on, but trying to pay attention in real estate, we started investing in real estate operating companies, literally before the 07, 08 crash. But that provided another opportunity where instead of partnering with a firm and paying them a fee to manage your assets, you could own part of that firm. Because one thing is clear in money management, they do make money, up and down markets and, and you're going to pay fees.

• 4:02David Weisburd?

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• 5:34David Weisburd?

  having some of those costs in-house. You used your scale to drive down fees with CoInvest, which Professor Steve Kaplan, with the Kaplan Sure Index, quantified that it's about 600 basis points, 2 and 20, 600 basis points. So doing one to one, you're basically only paying 300 basis points versus 600 basis points. And then you also look to have stakes of the manager, essentially.

• 5:59Speaker 01

  Better said than I could. I borrowed ideas from everybody. Early in my career, I'll give credit to Steve Myers in South Dakota, Matt Clark now. I copied some of their ideas in terms of how to operate like a money manager inside the government business model, which is not easy to do. Government business model is not a good model for almost anything and certainly not money management. But learning how to operate, working with the board, we were blessed in that we had fairly good governance. Yes, our board turned over. I think I had over 200 trustees sit in front of me over my 20 years. But what I found by being a teacher's system is teachers are focused on education.

• 6:42Speaker 01

  They think long-term, they care about the future of children, and they know what they know, but they also know what they don't know. So they were willing to learn when it came to the investment portfolio. Give us some latitude to operate, as I said, discretion. I can't hit it on enough. Governance really does matter, whether you're a private firm or a public firm, institutional investor, the governance structure of how you make decisions, who has what role and are those clear and clarified, literally adds a lot of value. We talk a lot about, you mentioned the Canadian model and, and the fact that it's a very different structure. Back in 1991, Ontario teachers and California teachers were almost identical.

• 7:26Speaker 01

  California's teachers was bigger, but they were very similar. But Ontario teachers at that point had a crisis of paying their benefits and the government said, hey, we're either going to take this full government or we need to go private. And that sort of branch in a tree, I think CalSTRS became more public, unfortunately, in government and teachers became the Canadian model.

• 7:48David Weisburd?

  And you said that you stayed away from chasing shiny objects when it comes to asset allocation. Why is that upstream of paying more fees or getting worse returns? Give me maybe a concrete example of that.

• 8:04Speaker 01

  Wall Street's very famous for creating new products and new fancy ideas. Global GTA, Global Tactical Asset Allocation, was the idea that, you know, give somebody some money and they're going to pick the best market, the best asset class and the best place to be in the world. You know, we call them GTA back in the early 2000s, 1990s. Now you probably call them global macro. But they proved to be incredibly expensive, even though they were using index funds. And sure enough, they couldn't time the markets around the world. Running an institutional portfolio is always a challenge. You see that with the turnover

• 8:44Speaker 01

  in CIOs, but for me, it was about building a culture of a team. Bret Harris said it too, empowering those people to outperform, giving them targets, get them the right tools and then get out of their way. You know, far too often on Wall Street, people get promoted because they're good at selling or they're good at transactions. That doesn't necessarily mean they're good at managing people. And, and that, this is still a human being interest business despite AI and all the futures. This is a people business and managing people and culture is critical.

• 9:21David Weisburd?

  How does a CIO build a world-class culture?

• 9:25Speaker 01

  You have to identify what kind of culture you want on Wall Street. We have seen firms that have competitive cultures, dog-eat-dog, and the winner rises to the top. I wanted, knowing my business model, I wanted a collegial culture. I was in Sacramento. I wasn't in a financial city center. I needed to home-grow my talent. Or you have to go kind of with the superstar idea of I'm going to hire somebody, pay them to come here. They probably won't stay because I'll probably lose them to somebody else that will pay more. But what I found most critical is if a culture produced alpha, when that culture started to change, the alpha disappeared. And it's really hard to see that because you have to be on the ground with that team.

• 10:09Speaker 01

  But when you talk to people after a firm has blown up, you realize how things changed from talking about stocks to suddenly talking about wealth management and tax projects and that, you know, people get rich and suddenly that alpha disappears.

• 10:27David Weisburd?

  There may not be a objectively good or objectively bad culture, but that doesn't seem to be the case with governance. There does seem to be a right model, which is decentralized versus a wrong model versus centralized. Is that still debated? And why do some organizations still have this highly centralized model that doesn't seem to play out in any good way in any case? One thing that I've learned from talking to hundreds of investors, founders and business leaders is that planning for the future isn't just about growing assets. It's also about protecting the people who matter most. Life comes with a lot of important milestones. Maybe you're buying a home, starting a family, planning for college, or simply thinking more intentionally about your financial future. As those responsibilities grow, it's worth making sure you protect those you love.

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• 11:35Speaker 01

  I'll, I'll push back on your idea that there are, uh, you know, if you have a sole leader at the top, I can think of one that comes to mind and that's Berkshire Hathaway. And we all know up until this year, who made decisions there? Seemed to be incredibly successful, but obviously not repeatable because there's not a whole lot of them. So a decentralized model, I think, brings the best of, of everybody's mind together and you get the best of the team. A centralized model does one thing, protect the center. I found personally, I didn't have God's single wisdom about which way the market was going to go. And what I found was valuable was constantly checking in with lots of different groups and different asset classes to get their feeling on the market, where's the best opportunities?

• 12:22Speaker 01

  Because they were specialists in their reflective fields and bringing them together and, and smashing them together. Came up with some very clever ideas and some good thinking. I remember particularly in a crisis in 08, we created what we called the ER team. We had, you know, the fixed income to be team debating TARP transactions. We had the real estate team develop, uh, debating acquisitions. We had the private equity team figuring out their capital flows and, and exits or, or entrances. And I think that brought people together. It's difficult to be an expert in all the asset classes. It's better to specialize in one, but then to get those specialists to work together as a team.

• 13:05David Weisburd?

  Could you build your portfolio in anticipation that there's going to be a crisis every so amount of years? And, and build that into the actual execution of the strategy?

• 13:15Speaker 01

  Portfolio resiliency is exactly what an institutional portfolio should be and wants to strive for because you're long-term. But it is one heck of a challenge to pull off because it's counter, it's counter to normal psychology. I love to quote Warren Buffett's phrase and it's simple, which is when everybody's greedy, you should be fearful. When everybody's fearful, you should be greedy. The reality is people are fearful for really short bits of time and people are greedy for, as we now know, decades. So it's hard to be patient and. What we tried to do to answer your question is put a little bit of that in portfolio, maybe 10%.

• 13:55Speaker 01

  Recognizing that because we're a 30-year horizon, we're going to capture and try to capture the beta of the market. And if we can just limit a little bit of the downside and still capture 90% of the upside. It is amazing how you improve the risk return profile of a big giant portfolio like that.

• 14:18David Weisburd?

  During your time at CalSTRS, you really focused on hiring the very best talent internally to manage different asset classes. What were you looking for from those LPs essentially that would be allocating capital for you?

• 14:34Speaker 01

  I wish I could tell you. You know, it doesn't, they don't come in with a flag waving it or a badge. They come in all shapes and sizes. They all come in both genders. They come in different colors, different backgrounds. Often challenge people is so much of Wall Street. It's not a complaint, it's just a reality, is from the Ivy League schools. But that doesn't mean they're great investors. You can find people with all kinds of backgrounds and that's kind of what I love about this day and age is that young kids are getting exposed to the markets. You know, I remember in my generation, growing up on the West Coast, nobody read the Wall Street Journal.

• 15:13Speaker 01

  No, you couldn't even see the markets on TV. It was on a little bit of a show in public broadcasting. But now it's out in front of them and they've got Robin Hood and they've got the opportunity to look at this. And I think we're going to find some very talented people in different places. And I would tell you that picking investments was frankly, a lot easier than picking people.

• 15:37Speaker 01

  What you're trying to find is somebody who's self-reflective. Because investing is hard, as I said, it's really about trying to anticipate the future and you got to be humble and realize you can't. It's taking all kinds of data.

• 15:52Speaker 01

  And you want some people who think literally A, B, C, D, 1, 2, 3, 4. You want other people who think tactically in patterns. So you need different types of, of, I always said, I want somebody who thinks like Excel. Everything's relative and down and up, but then I need somebody who thinks like an access database, who can take all these random facts. And I found that was true almost in every asset class. You didn't need just one discipline for one type of, one asset class. You needed people who could think differently, had different backgrounds, different education styles.

• 16:25David Weisburd?

  Somebody that's good at Excel and somebody that's good at multidisciplinary thinking. It's almost never in a single person.

• 16:34Speaker 01

  I didn't tend to find it. I tended to find people who, you know, like we said, you know,

• 16:41Speaker 01

  personalities and, and a mental process. When you study books about thinking processes, it is very rare to find somebody that can accomplish both very efficiently. You'll see people at the two extremes and they still could be brilliant. And it takes a culture then to bring those different people together with different thinking patterns. We tend to like people who think like us and act like us. Look at any accounting firm and you're probably going to find, you know, when you think about all those personality types, pretty similar personality types. I found the value, which was having a lot of people who didn't necessarily think alike and, but could work together, could be collegial and support each other.

• 17:26David Weisburd?

  Uh, last weekend I spent 10 hours with, with a famous investor who wanted to be off the record. So we'll keep him off the record, but he had done multiple deals with Buffett, with Bill Ackman, with Tony James and all these famous investors. One of the things I realized very quickly that I fallaciously thought that these were very similar people. And what I realized is they were extremely different, distinct styles. And my theory, not his, is that if you had actually moved that investor into another space, they'd be maybe media and maybe they'd still be top quartile, but they would not be a Bill Ackman. They wouldn't be a Warren Buffett if they were in a different context.

• 18:05Speaker 01

  Absolutely correct. I was California, so I was a swimmer. It takes a certain body type. When you look at the Olympic swimming people, very similar. You look at people that are great trumpet players or great violinists, might have certain characteristics. Not true of an investment. It comes in all shapes and sizes, both genders, all different backgrounds.

• 18:26David Weisburd?

  And you mentioned quite a crazy form of doing diligence non to spreadsheets, which is sitting in on a PM meeting at the fund. What are other sources of what I would call diligence alpha? Which is how you could get to ground truth on when managing, when diligencing a manager that most people don't take advantage of.

• 18:48Speaker 01

  You know, I think when you look at David Swinson and Yale's success, part of it was their incredible due diligence. I have heard many times that they would talk to a money manager for over a year before, in some cases, they would consider investing in it. So two quick examples. In one case, we talked to a money manager who told us over and over and over that it was a team process. Everybody did every decision by a team. There was a team vote on and on. One of my staff naively, we were talking to a portfolio manager and naively said, well, gee, what do you do when there are split votes? None of us thought to ask that. And them guys sat there for a minute and said, oh, you know,

• 19:28Speaker 01

  we never have split votes. It's always unanimous. And I'm like, well, that's really interesting because my team's not unanimous. How do you vote? Oh, well, the CIO goes first and then we go around the table.

• 19:41Speaker 01

  And I said, you know, if they generate alpha, recognize it's coming from that CIO, not the team. So if the CIO leaves, follow them. But let's not be naive here. It's not a team. It's one person led. And then another example is the, they told us that, you know, they were going to merge the team and move everybody to London.

• 20:03Speaker 01

  Again, one of my younger staff had done their homework and knew this person well enough from talking to them. And they're like, they have a pet.

• 20:11Speaker 01

  And London requires you to quarantine animals for six months. They're, they're never going to go. And sure enough, you know, when the day of the merger came and all of that, suddenly our PM wasn't around anymore.

• 20:21David Weisburd?

  What excites you most about asset allocation and investing today, 2026?

• 20:29Speaker 01

  But I don't have to do it. I'm retired. Um, no, I'm serious. I, I look out there at, at this new environment with, and I've seen

• 20:41Speaker 01

  industrial revolutions. I mean, I started out of college when the PC was just coming online and we knew computers uh, were the future. Um, the growth of cell phones. Uh, goodness, you know, we were talking recently about the AI revolution and I went all the way back to, you know, the railroad revolution, the steam engine, well, the steam engine, then the railroad, automobiles, cars, uh, telecom, airplanes, you can just run through any kind of major revolution. It's very difficult to identify the winners at the start. There are going to be some big losers among those firms. Generally, these kinds of evolution revolutions last about

• 21:25Speaker 01

  five to six years. The good old seventy-five, twenty-five, eighty, twenty portfolio in public markets has done extremely well relative to private markets of the last ten years. I have no idea what's going to outperform over the next ten years.

• 21:46David Weisburd?

  I'm gonna ask you a very difficult question. You got to in twenty-three years at CIO and before that, University of Washington, before that also at County.

• 21:56Speaker 01

  State of Washington. I wish the university, but just the state.

• 22:02David Weisburd?

  You got access to the greatest minds, the greatest GPs of that generation. If you had to pick one GP that was the most special, which one would you pick?

• 22:12Speaker 01

  Wouldn't be in private equity, it would be Howard Marks, uh, Oak Tree Capital. Uh, I did business with Oak Tree, boy, starting way back in the eighties, nineties. I love Howard's just plain speak. Uh, I used to take his letters and send it to my board regularly. Uh, you know, just his common sense language of, of, you know, if everybody wants something, maybe you should step away. And if people don't want something, that's an opportunity to look at it. Um, I still have some of his famous letters that he wrote, uh, on my files here in my office now that I'm retired because to me, even to my When I mentor people or my own children, it's like, you need to read this because this is

• 22:52Speaker 01

  time-tested information and knowledge on Wall Street. I put him at the top. Just an amazing person, brilliant career. You know, the stuff they did in the original days of Oaktree with distressed debt was pretty darn amazing.

• 23:13David Weisburd?

  I know you're only semi-retired. Tell me about what you do with Alman Advisors and what are you up to these days?

• 23:19Speaker 01

  You know, I serve on a board of a mutual fund complex and that keeps me pretty busy. We have 160 funds and $800 billion. So that's quite interesting. Alman Advisors, I'm really doing a lot of coaching and education. I've been doing a few projects. I'm a senior consultant with a governance consultant, Mosaic, and I've done some work where CIO was close to retirement and the firm, the fund had to figure out, should they replace the staff or should they outsource? Been working with some people about strategic planning and really trying to talk to boards about governance and why that really matters. And then lastly, one of the things that I enjoy a ton is, is teaching and mentoring, doing things like a podcast, teaching at universities,

• 24:03Speaker 01

  dropping into teaching classes and then mentoring some of the young investment people because I think there's tremendous opportunity in this industry. It's not well-known, certainly in the West Coast universities, that the money management business is there. Tons of firms and tons of opportunities. And so it's fun to build into young people and see them pursue the career.

• 24:26David Weisburd?

  Awesome. Well, Chris, I've been very excited to chat. You did not disappoint. Thanks so much for jumping on the podcast.

• 24:33Speaker 01

  My pleasure. I enjoyed it. Encourage people to listen in. 200 coming up on 300 podcasts. You're doing fantastic.

• 24:40David Weisburd?

  Thank you, Chris. That's it for today's episode of How I Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued