New York City’s TRS: Junk rallies make active management hard

US active managers are struggling to add value over the benchmark in the current economic environment.

At the October investment committee meeting for the Teachers Retirement System of the City of New York, TRS’ Tax Deferred Annuity Programme – which oversees so-called Passport Funds for beneficiaries seeking a supplementary retirement plan – board members heard how lower quality stocks are outperforming the broad market in what is commonly referred to as a “junk rally.”

It is making it difficult for active managers to outperform, explained board consultant Goldman Sachs Asset Management’s Michael Fulvio, presenting to trustees overseeing one of the city’s five retirement plans. One of the reasons poorer quality stocks are doing well is because they are often highly levered and are now benefiting from lower rates since the Federal Reserve cut rates.

“It has been a very challenging environment for active managers to add incremental value over the benchmarks we use,” he said, adding the latest data on active management is still to come through although the passport funds reported strong numbers from an absolute return perspective.

“We haven’t yet received active management numbers. It’s been a tough market for active managers to outperform public benchmarks and we will dive into this more in couple of months.”

Unlike assets belonging to the five New York City pension funds (TRS, the New York City Employees’ Retirement System, NYCERS, the New York City Police Pension Fund, the New York City Fire Pension Fund and the New York City Board of Education Retirement System) the Tax Deferred Annuity is not managed by the Bureau of Asset Management.

BAM poised to reengage with trustees

At the October investment committee meeting of the New York City Fire Pension Fund, the focus was on how the fund’s shared asset manager, the Bureau of Asset Management, is poised to re-engage with trustees. BAM collectively manages $282 billion in assets on behalf of nearly 800,000 beneficiaries.

In the new year, the Bureau will work closely with the different funds to ensure its strategy is aligned with their individual needs, alongside looking at headcount, staffing and compensation. The focus will be on understanding the priorities of each fund (they all have their own liabilities and asset allocation) and ensuring the Bureau meets those goals and expectations, said Steven Meier, chief investment officer and deputy comptroller for asset management, New York City Retirement Systems.

“We are looking to do much more customization. We are very receptive to that,” said Meier.

As of the end of fiscal year 2024, the pension funds collectively had an asset allocation of around 42 per cent in public equities, 32 per cent in public fixed income and 26 per cent in alternatives.

Meier added that the investment team are also concerned about the risk of over-diversification. They are trying to guard against siloed vertical thinking that ignores the overlap between, say, public equity and fixed income, or public and private markets. He said obvious overlaps are visible in real estate debt which overlaps with private credit/debt.

“We are going to look at exposure across the entire portfolio,” he said, flagging more conversations ahead on the economic factors driving performance.

Come the new year, trustees at the pension funds will also have a chance to scrutinize proposals to cease pension investments in fossil fuel infrastructure.

NYC Comptroller Brad Landers, fiduciary of the pension system, recently proposed the exclusion from three of the pension funds of future private markets investments in upstream and downstream fossil fuel infrastructure including midstream and downstream infrastructure, pipelines, distribution facilities and liquefied natural gas terminals.

Lander said the divestment proposal is the first in the country for a pension fund.

“That’s a big step that has not been taken by any large U.S. public pension fund, and we will have some work to do together to put it into place,” he said.