Texas Teachers sets 3% allocation to energy, natural resources

Teacher Retirement System of Texas, Austin, unveiled a new portfolio — one dedicated to energy and natural resources — that ultimately will total about $6 billion, during a busy board meeting on June 13 and 14.

The new portfolio will launch Oct. 1 with an initial target allocation of 3% — about $3.5 billion in current dollars — from the $117.5 billion pension fund.

Over time, the energy and natural resources allocation likely will increase to 5%, according to investment committee documents from the board of trustees' meeting.

Internal investment officials are establishing the dedicated portfolio for oil, gas, water, agricultural real estate, timber, mining and other related sectors in order to capture promising returns over the next 10 years and to diversify the overall portfolio, said Vaughn Brock, director and head of the new team, in his investment committee presentation.

Global energy and natural resources investment opportunities in 2013 alone are estimated to be between $900 million and $1.9 billion, Mr. Brock told committee members.

Texas TRS already has invested $14.2 billion — a 12% allocation — in energy and natural resources across the whole fund within broader investment strategies. Of that, $2.5 billion of focused ENR investments will be moved into the new portfolio.

About $9.8 billion of TRS' public equity portfolio now is invested in energy and natural resources strategies; private equity, $1.7 billion; real assets, $2 billion; and gold, $709 million. The assets are managed both internally and externally.

Exactly which strategies will be moved into the dedicated portfolio were not identified by Jase Auby, TRS' chief risk officer, in his written investment committee presentation.

Through additional hires of external energy and natural resources specialist managers, the pension fund should reach its initial 3% target allocation toward the end of 2015 and the 5% goal by mid-2017, Mr. Brock wrote in his report.

Mr. Brock didn't present specifics to the investment committee, but noted the ENR team is finalizing a manager “premier list” and over the next few years will “initiate more direct relationships with capital users” and “develop enhanced co-investment opportunities.”

By contrast, Texas Teachers' $13.4 billion private equity portfolio has reached its long-term target of 12%, Rich Hall, managing director and leader of the investment team, told the investment committee.

In a summary of the team's 2012 accomplishments, Mr. Hall said the private equity allocation returned 16.4% for the year and an annualized 16.8% for the 10 years ended Dec. 31. The portfolio also is “self-funding” with distributions of $55 million from existing investments exceeding the plan's contributions.

Mr. Hall's team was busy last year, committing a total of $3.7 billion, with $1.8 billion going to nine private equity funds; principal investments, $425 million; six funds within the retirement system's strategic partnership network, $1.4 billion; and $45 million split among three emerging private equity managers.

In 2012, an additional $3 billion is slated for commitment or investment in private equity strategies, Mr. Hall's report stated.

In a status report to the investment committee about the pension fund's real assets portfolio, Eric Lang, managing director and head of the portfolio management team, noted $2.2 billion was committed in 2012 and that up to $2.9 billion will be committed in 2013.

So far this year, the pension fund committed or invested a total of $1.1 billion to the following real estate investments: Berkeley Capital Partners III fund, $15 million; Blackstone Real Estate VI Secondary fund, $47 million; ECSF Germany (Zentrum) fund, €64 million ($85 million); KKR Real Estate Partners America fund, $300 million; Oaktree Real Estate Opportunities Fund VI, $150 million; OCM STR Co-investment, $100 million; Savanna Real Estate Fund IIA, $15 million; TriGate Property Partners II fund, $15 million; KKR Real Estate Partners Americas, $300 million; and Tristan EPISO 3 fund, e100 million.

The real assets portfolio totaled $13.9 billion as of Dec. 31 and accounted for about 12.7% of total pension fund assets. Mr. Lang said in his report that the real assets portfolio should reach its target allocation of 15% by 2014.

The results of Texas Teacher's investment management prowess were evident with strongly positive returns that outperformed the fund's benchmarks in all periods ended March 31, according to a performance report from Hewitt EnnisKnupp, the consultant to the board of trustees.

As of March 31, the pension fund and benchmark returns, respectively, were: for the quarter, 3.6% and 3.4%; one year, 10.4% and 9.3%; three years, 10.1% and 9.9%; five years, 4.8% and 4.6%; 10 years, 8.6% and 8.4%; and since inception (June 30, 1991), 8.8% and 8.3%. (Returns for periods of more than one year are annualized.)

A major source of outperformance in the quarter ended March 31, according to HEK's report, was directional hedge funds, which returned 4.8%, topping the benchmark return by 1.4 percentage points.

The pension fund's strategic partnership network, which is composed of five external money managers running a total of $6 billion, in aggregate consistently outperformed the program's customized aggregate benchmark as of March 31. For the quarter, the network returned 4.5%; for one year, 10.5%; and three years, 10.5%. The benchmark returned 3.9%, 9.6% and 10.2%, respectively, for the same periods.

HEK's report noted that of the four strategic partners with a three-year track record in the program, only BlackRock (BLK) Inc. (BLK), which managed $1.3 billion for the Texas fund as of March 31, underperformed the benchmark with a 9.6% return for the three-year period.

The other managers in the program with three-year records are J.P. Morgan Asset Management (JPM) and Neuberger Berman Group, which each managed $1.4 billion for TRS and returned 10.9% and 10.5%, respectively for the three-year period; and Morgan Stanley (MS) Investment Management, which ran $1.3 billion as of March 31 and returned 10.5% for the three years. Barclays Capital managed $600 million as of March 31, but has not reached its three-year anniversary.

In its presentation to the Texas TRS board, HEK showed investment returns of $4.1 billion outpaced net withdrawals of $980 million in the first quarter of 2013 to raise total assets of the retirement system 2.7% to $117.5 billion.

Texas TRS: Real assets allocation through the year
The Teacher Retirement System of Texas' latest quarterly review of its real assets portfolio shows how its portfolio composition has changed over the years. With a 15% target allocation for the $117.5 billion pension fund, the real assets portfolio aims to achieve a long-term return of 10% while also serving as an inflationary hedge and portfolio diversifier. Since the end of 2007, core real estate holdings have increased the most, 15 percentage points to nearly 30% of the portfolio at the end of 2012. Other real assets, which include infrastructure, oil and gas, and commodities increased by 11 percentage points to 16% of the portfolio, while its real assets special situations category (which includes REITs) stands at 9% of the portfolio.