Fee Transparency and Alignment of Financial Interests Paul Rosenstiel Trustee CalSTRS September 11, 2018 The views expressed are not necessarily the views of CalSTRS

CalSTRS Fee Disclosure Shows How Much We Pay for Private Asset Classes

Most of the Additional Benefit from Private Equity Goes to Investment Managers

Evolution of an Alignment of Interests Investment Belief Investment beliefs first discussed October 2015 First consideration of an alignment of interests belief November 2016 “There should be an alignment of interests between CalSTRS and its external managers and advisors. Such alignments should be transparent and relate not only to the equitable sharing of economic interests, but also to the broader CalSTRS mission in such areas as best-practices investing (as reflected in CalSTRS’ 21 risk factors and its adherence to the UNPRI) and ESG-related issues.” Then in April 2017 “Alignment of interests between CalSTRS and its advisors is critical. The economic interest of CalSTRS and its external managers and advisors should be aligned, and transparent. In addition, CalSTRS expects its managers and advisors to recognize the long-term value of CalSTRS investment policies relative to best practices, responsible corporate governance, and the impact of ESG- related issues on portfolio performance.”

And then . . . Our Investment Advisor offered two possibilities in July 2017: “Option A: CalSTRS is best served when there is maximum alignment of financial interests with its external investment and advisors and managers, and maximum transparency about those interests.” or “Option B: CalSTRS is best served when there is maximum alignment of financial interests with its external investment and advisors and managers, and maximum transparency about those interests. CalSTRS creates alignment of financial interests with its external investment advisors and managers by utilizing clear contracts and by specifying fees, investment objectives and investment benchmarks.” Our Investment Advisor explained: “Option A allows financial interests to be interpreted beyond the scope of CalSTRS’ investment activities. Option B narrows this scope to strictly the business arrangements/relationships that CalSTRS has with its advisers and managers.”

And further . . . Staff report in February 2018: “The concept of alignment of interests is the core of the investment staff’s evaluation of any investment and a key part of any negotiation. The question is whether alignment rises to the level of a full Investment Belief.” Investment Advisor Recommends and Board adopts: “In keeping with existing policies, guidelines and procedures, CalSTRS is best served when there is contractual alignment of financial interests with its external advisors and managers, and transparency about those interests.” Final editing is approved by Board in July 2018 “In keeping with existing policies, guidelines and procedures, CalSTRS is best served when there is contractual alignment and transparency of financial interests with its external advisors and managers.”