Jase Auby, TRS’ celebrated chief investment officer, explains why TPA doesn’t fit with its culture; his view that community pushback on data centres could turn out to be an investor advantage, and argues the case for continuing to invest in fossil fuels. Top1000funds.com sat down with the CIO in his Austin office for an all-encompassing conversation.
The sense of optimism is pervasive in Austin, Texas. It is captured in the 70,000 student population, the autonomous cars that beetle around the city and the swagger that comes from being the capital of a US state that is also the world’s 8th largest economy, larger than several members of the G7, gathering in Europe for its annual meeting at the time of writing.
The (relatively) local company, SpaceX, is based a few hours down the road, and the topic du jour following its $75 billion IPO, the largest in history, as investors piled into a future of satellites, rockets and AI.
“That’s been fun to watch,” says Jase Auby, chief investment officer of the $225.3 billion Teacher Retirement System of Texas (TRS) in conversation with Top1000funds.com in his office in Austin.
Auby is seated in a spacious corner office in new premises on the outskirts of the city in a nod to another factor fuelling Austin’s success. The availability of land has allowed companies like IBM in the 60s, Dell in the 80s, Wholefoods, Apple (Austin has the largest number of Apple employees outside Silicon Valley) and now Tesla, to flourish and scale, and provide plentiful new housing to the city’s young families.
“There is a sense of a growing pie and that we are all in it together and not fighting for a shrinking set of resources. It permeates all that we do,” says Auby.
He is similarly optimistic about investment opportunities for TRS’s two million members across the state. He believes the American economy is in “a really good place” and US corporate earnings are encouragingly healthy. Inflation, though elevated, will be possible for policymakers to manage. If he was beginning his career today he’d jump into AI “with both feet” and the technology’s underlying infrastructure continues to offer huge investor opportunity.
It’s an early segue in a winding conversation full of revealing windows into the world of an Austin resident.
Auby believes that growing community opposition to data centres holds an opportunity for investors because it could make existing exposure more valuable. Because data access latency is important, people may even want to get closer to the tools and infrastructure that support the internet and AI in their communities.
“Longer-term, there could be pushback in a positive sense.”
Anyway, in the future data centres are most likely to be dotted along coastlines in the same way nuclear power stations use the ocean for cooling. Ultimately they could even be underwater, and he doesn’t rule out Elon Musk’s promise to put them in space either, although he calls the economics of doing so “daunting.”
Back on earth, Auby does acknowledge some signs of over-optimism however.
The high price-to-sales ratio for some companies is something to watch. The S&P 500, sitting at 3.4 times price-to-sales is “pretty high.” Space X, depending on the price on any given day, has a price-to-sales near 100 times.
“That’s up there,” he says.
As a counterweight to its 57 per cent allocation to global equity (increased in the 2024 strategic asset allocation) TRS is mindful of the corners of the public markets portfolio that bring diversification and get away from the reliance on equity risk premium.
Like a 5 per cent allocation to risk parity which he enthuses has had a good run in recent years after a long period in the doldrums. Performance depends on where the risk level is set – this could be 60:40 or 80:20 stocks to bonds, for example – to target maximum diversification.
“Diversification is our friend when we are managing these big pools of assets,” he says.
Elsewhere, TRS has gone overweight hedge funds in a strategy that is run internally but uses external hedge funds. TRS owns hedge funds in two different ways. One allocation accounts for 5 per cent of the 21 per cent stable value portfolio. Here, hedge funds target zero beta designed to hold value in a crisis.
In the other portfolio, the beta target is the opposite and TRS targets 1.0 for the beta. This is achieved by a strategy where the hedge funds have a much lower beta (like 0.2) that is then overlaid with futures to achieve a beta of 1.0.
Despite his enthusiasm for the more technical asset classes, Auby insists, like children he doesn’t have a favourite (he has four and is about to become an empty nester). It’s something he attributes to arriving in the CIO seat from TRS’s risk team rather than a specific asset class vertical. He says it has helped him avoid “the classic CIO trap” of spending more time than he should wedded to old relationships instead of adopting a CIO’s horizontal view.
“It’s easier for me not to have a favourite asset class,” he says.
Perhaps it has also been informed by the fact that his earlier career on Wall Street always tended to avoid working in the most sought-after areas. He chose instead to join exploratory and unknown teams hiring from scratch, like Lehman’s CDO group or later, TRS’s new risk team.
“Oftentimes people try to find the hot area which right now would be, say, data centres. But the thing that is going to be the best over the next time period is the thing that is hiring right now.”
TPA is nothing new
But his lack of asset class affiliation hasn’t made him an enthusiast for TPA, the dynamic investment framework gaining traction with global investors that steers away from traditional asset buckets.
Auby recognises its advantages and notices that every fund has its own distinct way of implementing it.
But he is inherently cautious about how the central premise of TPA would impact TRS’s culture that deliberately empowers bottom-up decision-making. TRS has pushed autonomy out to the asset classes whereby the individual investment teams have their own, separate committees which run much of the day-to-day allocation.
“We are not at the right moment in our journey to come back and pull authority into the centre or embark on a centralisation effort,” he says.
Moreover, he’s convinced empowering people is a vital ingredient to investment success.
“Where I can I make it clear to the team they are making this decision; they are not here to get my approval, they are here to consult with me. It really empowers people, and it’s part of pushing autonomy downwards. When they are making decisions, it puts them in a different mindset than when they are trying to provide all the information to a decision maker.”
Nor is he convinced that TPA can bring the outperformance its proponents claim.
He acknowledges that the strategy priorities dynamic movements more in a portfolio than strategic asset allocation. But he questions if investors have the skills to successfully pursue underweights and overweights in a portfolio from a top-level perspective.
“It’s not something we’ve been able to do that well historically,” he says, recalling TRS’s decision to abandon a tactical asset allocation despite an extensive research effort. It proved too difficult to effectively move the giant fund.
His final reason for caution rests in a belief that TPA is not a new idea. It is a menu of ingredients off which investors can pick and choose and many already have elements of the strategy. They are just not calling it TPA.
Take TRS’s risk team for example. They take a portfolio-wide view of risk and consistently model it across all asset classes to inform central decisions. In July, the board will explore the risk implications of the fund’s aggregated data centre exposure that sits in four asset classes, for example
Going back further, he reflects that Canadian investors original reference portfolios, integrated 15 years ago and which put in full risk systems across their entire fund, were another early sign of TPA.
why Fossil fuels will continue to be successful
If optimism is one hallmark of being located in Austin, Texas, fossil fuel investment is another.
For all TRS’s preparedness to grasp the future, the portfolio remains grounded in fossil fuels. TRS is one of the last remaining pension funds to have a (6 per cent) dedicated energy portfolio that has grown as other investors have divested fossil fuels.
In fact, Auby is openly sceptical of innovation in energy – although he reflects, without any sense of irony – that fracking was a successful innovation. It makes him wary of SMR or cutting-edge fusion, and he’s even circumspect of much simpler energy forms like wind, although TRS does have exposure to renewables.
“The economics of wind were unproven and many key parts of the projections were on paper only. It turns out things like maintenance schedules, costs and the impact of inflation, were not estimated well. I’ve learned to be very sceptical of investing in innovation in the energy space.”
He’s also confident fossil fuels will continue to provide important returns because of capital constraints in the energy space as global demand continues to climb.
Would he have the same strategy if TRS was in a blue state?
“I don’t know the answer to that. The board maintains the investment authority, the board defines the guardrails, and I would follow what the board instructed me to do.”
relationship alpha
Guidance on strategy and opportunities also come from another, more unusual source.
TRS has build deep strategic partnerships with five asset managers including KKR and Apollo that has generated approximately $1.3 billion of excess returns since it began in 2008. The “relationship alpha” goes beyond what the investor already taps with its managers by virtue of its size. Scale, says Auby, already allows TRS to negotiate on fees and structure, and integrate bespoke solutions that fit its goals and objectives better.
But the Strategic Partnership Network gives TRS access to elite managers’ entire investment platform and best ideas across market cycles, as well as the ability of staff to ask any questions they might have.
He says the decision to reduce treasuries in the 2024 strategic asset allocation was heavily informed by expertise in these relationships.
Now AI is another.
“JP Morgan, for example, is way ahead of us on how to roll out AI to employees,” he says. “Public funds are always going to be people constrained. It’s hard for us to marshal the resources we need to consume the research that our partners bring to us. Focusing on just a core number, can really help us prioritise.”
Particularly given that, in a Catch-22, as the fund grows bigger, the number of managers inevitably grows too.
But despite the odd downside of size, true to the Texas mantra, Auby believes that big is still best.
“I’d rather we were big than small,” he concludes.
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