Fund Replaces Investment Chief

The veteran chief investment officer of the $68-billion California State Teachers’ Retirement System fund was replaced on Friday, a victim at least in part of his conservative investment philosophy in a roaring bull market.

Thomas Flanigan, 56, who has overseen assets of the teachers’ fund for 11 years, lost the position in competition with five other candidates, the CalSTRS board said.

His successor will be Patrick Mitchell, 48, the fund’s director of bond and stock investments.

Flanigan had been criticized by some board members, including state Controller Kathleen Connell, for keeping a relatively low percentage of the fund’s assets in U.S. stocks in recent years, as the market has soared.

The fund currently has 33.6% of assets in U.S. shares. In contrast, 36.5% of its assets are in bonds.

Flanigan has argued for some time that the U.S. stock market is overvalued and that a prudent investment course for a pension fund is to avoid risking beneficiaries’ assets in high-risk securities.

But the performance of the CalSTRS fund relative to its peer pension funds has suffered because of Flanigan’s stance, as U.S. stocks have rocketed since 1994.

In 1996 the fund earned 9.9% overall on its portfolio. Its sister fund, the California Public Employees’ Retirement System, which has a far higher share of assets in stocks, earned 12.9%.

Flanigan was brought into CalSTRS in the mid-1980s to fix the fund after a scandal. He has reigned over it since then largely unchallenged, although he was supposed to invest within guidelines set by CalSTRS’ board.

Flanigan also had personal discretion over an account that held 10% of the fund’s total assets. That account has been primarily invested in bonds in recent years.

On Thursday, however, the fund’s board voted to raise the portion of total fund assets in stocks and cut the bond portion. A CalSTRS official said Friday that Flanigan told the board Thursday that he agreed with the shift.

Flanigan did not go into the fund’s Sacramento office on Friday, and wasn’t available for comment. Sources say he was most likely stunned by the board’s decision because he still had many allies on the 11-member board, despite criticism by Connell.

CalSTRS offered Flanigan the job of strategic investment consultant at the fund for at least a year, but it is not clear whether he will entertain the offer.

Mitchell, who has worked at CalSTRS since 1988, will earn a base salary of $185,000 to $230,000 with a 10% bonus incentive.

CalSTRS, the pension fund for California teachers from kindergarten level through community college level, has 540,000 active and retired members.