The State Teachers Retirement System of Ohio has warned of a “material” increase in US recession risk compared to last year as the fund braces for a wider, “negatively skewed” distribution of outcomes in the next 12 months.
The $108 billion fund, which oversees retirement assets for the state’s public educators, said that recession – while remaining outside of its base case – would be detrimental to its funded status, which sits at 81 per cent, if it was combined with negative portfolio returns.
It came as the fund culled policy allocations to domestic and international equities and is leaning into new fixed income and new asset classes including liquid alternatives, prioritising yield and liquidity. In private markets, the fund is also targeting billions of new commitments into private equity and private credit.
“The probability of a recession has increased, as energy-related inflation pressures combined with slowing growth limit the FOMC’s room to ease and could potentially require tightening,” Ohio STRS said in its investment plan for the new financial year published on its website. A survey of internal portfolio managers at the fund put the probability of a US recession over the next 12 months at an average of 23 per cent.
The Federal Reserve holding interest rates and US growth maintaining its long-term sustainable rate remain the base case for the fund. The stronger outcome would see improved inflation dynamics and resilience in household demand and business investments, while the weaker outcome would see persistent pressure from energy prices and weak labour market conditions.
The fund is of the view that overall economic risks in the next year are “tilted to the downside”.
“Under the base case, growth runs around trend – meaning near its long-term sustainable pace – supported by consumer demand and AI-driven investment, though the distribution of outcomes is unusually wide,” the fund said.
“[Of the conflict in Iran], even under a negotiated outcome, normalisation of oil flows and global trade is expected to resume gradually over several months, with lasting structural impacts on shipping behaviour, insurance costs and risk premia.
“This environment reinforces downside risks to growth, supports a higher-for-longer inflation backdrop and contributes to increased dispersion across global markets.”
Prioritising liquidity
Despite the macroeconomic challenges, the risk with the highest probability and most financial impact for Ohio STRS would be not meeting its long-term actuarial rate of return, which is 6.42 per cent per annum over a decade.
The mature plan has stabilised its funded ratio to above 80 per cent since 2021, but 2025 was the first year in over a decade where that ratio decreased compared to the previous period. Liquidity risk is a prime consideration for an investor with approximately $4 billion of negative cash flow per annum.
The fund completed its most recent asset liability study in 2025 and a new asset allocation will be rolled out over a three-year period.
Changes include increasing the policy allocation for its liquidity Treasury portfolio (from 5 to 5.5 per cent) and creating a long Treasury portfolio (with a 3 per cent policy allocation) to provide the total fund with more duration and liquidity. In the new fiscal year the fund said it will continue to grow the two areas.
It will also expand the actual allocation to core plus fixed income to bring it closer to the long-term policy allocation of 21.5 per cent, with selective overweights in credit and securitised sectors. It’s currently overweight mortgage-backed securities, asset-backed securities, investment grade corporates and high yield.
Liquid alternatives will also play a bigger role as a new standalone asset class with a long-term policy target of 7 per cent. It’s a budding area of allocation which only represents 1.8 per cent of the fund as of April 2026, as the fund seeks uncorrelated return sources from public equities.
Over half of the liquid alternatives portfolio is currently allocated to alternative risk premia strategies, and the rest roughly split equally between directional and opportunistic strategies.
Long-term policy allocations to stocks will be significantly culled to fund the more yield-driven and diversifying asset classes. The domestic equities’ policy target has been reduced from 26 per cent to 19.25 per cent, while international equities is reduced from 22 per cent to 15.75 per cent.
“We maintain overweight positions in large, high-quality companies, where cash flow generation and AI advantages are most prominent, while holding smaller companies at benchmark weight until sustained earnings improvement and definitive interest-rate relief indicate a stable recovery,” the fund said of US equities.
In international equities, the fund will manage the portfolio with a slight increase to emerging markets compared to developed markets (21/79 split) as opposed to the 20/80 neutral split in expectation of stronger emerging markets earnings growth.
Private asset classes including real estate, private equity and private credit will largely remain in line with the current allocation.
In property, the fund will rebalance towards residential and industrial property types and reduce office exposure. In private equity, it will target $1.1 – 1.5 billion in new commitments, focusing on buyout in middle market managers, scaling venture and growth exposures and expanding co-investments and direct investments. In private credit, it will target $1.4 – 2.2 billion in new commitments focusing on direct lending, specialty finance and direct investments.