A successful tactical bet by the investment team of the Teacher Retirement System of Texas fuelled a heated debate at the April investment committee meeting which concluded with chief investment officer, Britt Harris, dismissing the need for more flexibility in the fund’s policy statement.
For more than a year the fund had an overweight position to credit, and an underweighting of 5.5 per cent to long treasury bonds, which was the fund’s largest risk position at an asset allocation level.
The investments were primarily in dislocated credit, and the allocation was a large contributor to the fund’s outperformance, and top ranking in its peer group, for the 2010 period.
Subsequent analysis of the performance, and the fund’s asset allocation positions, at the most recent board meeting triggered discussion about the appropriate benchmark against which to measure such outperformance.
It was also suggested that staff should have the flexibility to make an opportunistic play, and perhaps a percentage allocation be made for opportunistic or tactical bets.
Chief investment officer, Britt Harris, dismissed this idea, saying: “We have all the flexibility we need. There are tactical asset allocation ranges within the investment policy statement.”
The fund’s consultants, Hewitt Ennis Knapp, said by any measure the fund outperformed, whether the benchmark be LIBOR+200 or Lehman 10-year swap.
The consultant also said another alternative was to benchmark the performance against the policy asset allocation as an aggregate, or an opportunity cost benchmark.
Looking at the fund’s investment performance attribution revealed 80 basis points of outperformance was due to asset allocation, including the tactical credit position, while security selection accounted for 90 basis points.