Texas Teachers wants more discretion over external managers/derivatives…

The investment team of the $97 billion Teachers’ Retirement System of Texas will request the removal of sunset clauses on its use of external managers and derivatives, or at least increase the maximum limit on external managers from 30 to 50 per cent of the fund, at a legislative hearing in August.

At the fund’s board meeting last week chief investment officer, Britt Harris, said about 17 per cent of the fund was invested with external managers predominantly in global equities (12 per cent) and its strategic partnerships (4 per cent), but also in credit.

He said the fund would propose a request to remove the sunset provision (an exception to investment rules set by the state government) or to increase the allocation to external managers to 50 per cent. The fund uses performance-based fees.

According to Harris, TRS added more than $1 billion in returns and saved $200 million through the use of derivatives in the past year, and would like the sunset provision limiting the use of derivatives removed.

“We have an inhouse risk management team and a risk management committee of the board, we have a lot of infrastructure around it,” he said.

In addition the fund would like to increase its authority in the use of hedge funds, which were limited to a 5 per cent allocation in 2007.

“We have about 35-50 hedge funds in our portfolio. It’s very conservative and in the stable value part of our portfolio,” he said.

An external consultant has been hired by the Texas state auditor’s office to gain an independent view of the fund’s use of derivatives and hedge funds.

The TRS board will meet in the future to discuss its legislative priorities.