Trustees of the Teacher Retirement System of Texas, Austin, hired a new investment partner to run $500 million; hinted at a new strategic partnership program for private equity that will launch later this year; and adopted a new asset allocation mix that increases allocations to hedge funds and private equity by about $3.4 billion and $1.4 billion, respectively, in current dollars.
Texas Teachers hired Barclays Capital Fund Solutions-Americas to manage $500 million in a customized global mandate as the $109.9 billion fund's fifth strategic partner, according to support materials for the fund's Sept. 15-16 board meeting.
In a Sept. 15 webcast presentation about the fund's strategic partnership network, Curt Rogers, director of portfolio strategy and explanation, noted that the first four companies were hired in 2008 to manage $1 billion each in liquid publicly traded securities. As of June 30, BlackRock (BLK) Inc. (BLK), J.P. Morgan Asset Management (JPM) and Neuberger Berman Group LLC each managed $1.2 billion; and Morgan Stanley (MS) Investment Management managed $1.1 billion.
With the Barclays hiring on July 1, the strategic partnership network program totaled $5.2 billion, Howard Goldman, a fund spokesman, confirmed by e-mail on Sept. 20.
Funding for the Barclays Capital portfolio came from the system's 5% allocation to the program, according to Mr. Rogers' presentation.
As of June 30, the aggregate returns of the program's managers were 0.8% for the quarter; 5% year to date; 25% for the one-year period; and an annualized 5.4% for three years, according to investment performance information presented to the board by consultant Hewitt EnnisKnupp.
T. Britton Harris IV, chief investment officer, told trustees in the Sept. 15 webcast that investment staff is preparing a strategic partnership network with managers of private investments, with the program likely rolling out before the end of this year. He did not provide details about the program orally to the board, but meeting materials indicate the system is “expected to expand the scope of TRS' relationship with selected” private equity managers.
Trustees also approved modifications to the plan's investment policy statement that include asset allocation changes that increase hedge fund and private equity investments, according to the Sept. 15 board meeting webcast.
Broadly, the new asset allocation increases global equity to 62% of plan assets from 60%; drops stable value assets (U.S. Treasuries, hedge funds and cash) to 18% from 20%; and holds the allocation to real-return assets (including global inflation-linked bonds and real assets) at 20%, according to meeting materials.
Added within the global equity category is a new 5% allocation to directional hedge funds, funded by reducing U.S. Treasuries to 13% from 15% and in U.S. small-capitalization equity to 2% from 5%.
The private equity allocation within the global equity category was increased to 12% from 10%, with funding coming from a reduction in U.S. large-cap equity to 18% from 20%.
Within the global equity class, no changes were made to the 15% allocation to non-U.S. developed markets equity or to the 10% allocation to emerging markets equity, according to meeting materials.
The new directional hedge fund allocation follows legislative authority granted earlier this year by the Legislature that allows the system to double its allocation to hedge funds to 10%.
Within the stable value portfolio, the fund maintained a 4% allocation to stable value hedge funds, which had been labeled “absolute-return” funds under the prior asset allocation scheme.
The benchmark for the new directional hedge fund allocation is the HFRI Fund of Funds Composite index and the new benchmark for the stable value hedge fund strategies is the HFRI Fund of Funds Composite Conservative index. The absolute-return funds under the previous portfolio structure were pegged to a benchmark of LIBOR plus 200 basis points, board meeting materials showed.
The rest of the stable value asset class is the 13% allocation to U.S. Treasuries and a 1% allocation to cash.
No changes were made to the individual asset classes within the real-return portfolio, with the allocation to global inflation-linked bonds remaining at 5% and real assets at 15%.
The timing of implementation of the asset allocation and other modifications to the investment policy statement were not discussed by the board during the webcast of its meeting.
Hewitt EnnisKnupp reported that returns for the system overall as of June 30 were 1.3% for the quarter, 22.2% for the year; 3.4% for three years; 4.9% for five years; and 5.7% for 10 years. Multiple-year returns are annualized.
In separate news, R. David Kelly was reappointed by Gov. Rick Perry as trustee and board chairman of the retirement system, Mr. Goldman confirmed in an interview on Sept. 16.
Mr. Kelly has been a trustee since November 2007 and chairman since October 2009; his new term as a trustee expires Aug. 31, 2017. He will remain chairman for a term to “expire at the pleasure of the governor,” Mr. Goldman said.
Trustees Todd Barth and Eric C. McDonald were named to chair the investment management and risk management committees, respectively, Mr. Goldman said in his Sept. 20 e-mail.