Stable value at TRS proves ballast in extraordinary times

Texas Teacher Retirement System, the $211.6 billion Austin-based pension fund, has an asset allocation that is built to withstand the “extraordinary times” and adverse climate investors face today, reassured CIO Jase Auby, speaking during the latest update at the fund.

A 21 per cent allocation to stable value wholly tasked with maintaining value even during “pre-recessionary times, if you believe we are on a path to recession” has proved most robust.

All four asset classes comprising real and nominal government bonds and hedge funds have remained positive proving a “ballast” that the fund depends on as it navigates the impact of negative GDP and corporate earnings news, weak demand and a flight to quality.

“The markets are highly volatile. It’s worthwhile emphasising how our asset allocation is built to  last and weather storms like this,” said Auby.

The pension fund’s  57 per cent allocation to global equity comprising public equity (45 per cent) and private equity (12 per cent) was down about 7 per cent reflecting the sharp fall in the S&P 500 which has experienced its third largest fall in post WW2 history.  “The two other times were during the GFC,” said Auby.

The impact of recent volatility on TRS’ real return allocation that includes real estate (15 per cent) and energy, natural resources and infrastructure (ENRI) is more difficult to gauge because the portfolio is private and not mark to market, he said. However, the energy allocation that includes oil and natural gas has suffered falls in oil, but positive returns in gas.

The risk parity allocation was down but still “holding its own.” This portfolio seeks to deliver the same level of return  but do so with less emphasis on the equity market.

Poised for the offensive

Auby told trustees the fund has maintained its standard rebalancing processes through the market turmoil.

“At this point in time, we have no insight or special information on how [Trump’s tariff polices] will role out,  so the best alternative is to rebalance and be as close to the benchmark as we can possibly be. But we also recognise there will be a time for offence, and to go back into the public equity market if there is a draw down to a substantial degree.”

Typically a drawdown of around 32 per cent signposts recession, and he said only at this point would TRS consider “going on the offence” and pause rebalancing so rigorously.

“When it’s time to play offense we’ll do so.”

He added that TRS’ overweight to private markets has been offset by depressing the All Country equity allocation. Last year, TRS has rolled out a new SAA that includes an increased long-term target allocation to public equity from 40 per cent to 45 per cent. It combined regional portfolios into a $70 billion all country allocation; a $9.6 billion portfolio of non-US developed market equities and a $1.9 billion emerging market allocation that fully excludes China and Hong Kong in line with new Texas laws.

TRS recently experienced the high level departure of Mohan Balachandran after 17 years at TRS where he came to lead multi asset strategies. Auby said attrition, which had been low, has recently spiked with 12 members of the investment team leaving so far this year.

Staff resignations have led to a restructuring of the teams that implement public market quantitative strategies. A new quantitative equity group will continue current stock selection strategies, but TRS has reduced assets in internal quantitative equity strategies by approximately 60 per cent with the intent to grow them back as appropriate.

In another note, TRS has ended its working from home policies with staff now in the office five days a week.

“The parking lots are full,” said Auby.