Texas Employees' Retirement System, Austin, reduced its rate of return and adopted a new asset allocation that increases the aggregate weighting to illiquid alternative strategies by 11 percentage points.
The new allocation increases the target weighting for private equity to 13% from 10%; real estate to 12% from 10%; infrastructure to 7% from 4%; and adds a 3% allocation to opportunistic credit. Global credit also increased to 11% from 10%.
Asset class reductions move the investment target for global equity down to 37% from 45% and for rates to 11% from 15%. (The rates portfolio includes U.S. government bonds and mortgage-backed securities.)
The target allocations to hedge funds and cash are unchanged at 5% and 1%, respectively.
The expected median 10-year return for the new asset allocation is 7.2%, with expected risk of 11.6% and a Sharpe ratio of 0.413, meeting documents showed.
The new asset class weightings are effective Sept. 1, the beginning of the $27 billion fund's fiscal year, and were approved by board trustees at a meeting Wednesday.
At the same meeting, trustees also reduced the fund's assumed rate of return to 7.5% from 8%. The annualized assumed rate of return was 8% for the 20-year period ended Aug. 31, 2016, used for an actuarial pension experience study; the actual annualized return for the period was 6.9%.
Also, trustees accepted the recommendation of investment staff to commit up to $1 billion in private equity in the fiscal year starting Sept. 1. The investment pace in fiscal year 2017 was $750 million. Private equity investments and commitments totaled $3.5 billion, about 13% of plan assets, as of June 30.
The tactical plan for real estate investment for the next fiscal year is $225 million, primarily for commitment in non-core opportunities. The 2017 fiscal-year target was $250 million. Private real estate investments and commitments totaled $2.9 billion as of June 30, about 11% of the plan's assets.
Aon Hewitt Investment Consulting reported positive net returns that matched or exceeded benchmark returns for all measurement periods ended June 30: three months, 3.6% (benchmark, 2.8%); one year, 12.4% (12.3%); three years, 5.3% (5.3%); five years, 8.4% (8.3%); and 10 years, 5.2% (5%). Multiyear returns are annualized.
The return for year ended June 30, 2016 was -0.1%, compared to 1.4% for the policy benchmark.
The plan's asset allocation as of June 30 was 59.6% global equity, 14.3% rates, 11.3% real assets, 8.8% global credit, 3.8% hedge funds, 1.8% cash and 0.4% special situations.