The $142 billion Teacher Retirement System of the State of Texas is the latest big institution to increase internal management of global equities and embrace risk premium-based investing.
After an 18-month best-practices review, the investment staff of the Austin-based pension fund completed a major overhaul in September of the retirement system's $54.3 billion global public markets equity portfolio with the goal of increasing its alpha production.
Among the biggest changes to management of the global equity portfolio is an 8-percentage-point increase in internally managed assets, said Jase Auby, Texas Teachers' deputy chief investment officer.
Another critical element to improving TRS' alpha production is the incorporation of alternative risk-premium investment across the entire pension fund. Mr. Auby said the goal is for risk-premium investment strategies to contribute half of the 100-basis-point excess-return target for the whole portfolio.
Alpha production by the global public markets equity portfolio has been good, producing a total of 29 basis points over the five years ended June 30 with the greatest outperformance over the period — 384 basis points — coming from an internally managed, quantitative low-volatility fund.
"We had positive alpha but would have preferred to have had more. We wanted to see what we could do to increase alpha from the global equity portfolio," Mr. Auby said.
By way of setting the stage, TRS' actual overall asset allocation as of June 30 was 59.9% global equity, 19.6% real return, 15.5% stable value and 5% risk parity.
The public markets portion of the global equity portfolio totaled 43.4%, with a breakdown of 17.6% U.S. equities, 15.9% non-U.S. equities and 9.9% emerging markets equity, according to a quarterly investment review prepared by Aon Hewitt Investment Consulting.
The $5.8 billion directional hedge fund and $12.5 billion private equity portfolios housed within TRS' overall global equity allocation were not part of the restructuring.
About 52% of the existing global public markets equity portfolio was managed by external managers as of June 30; close to 40% was internally managed in a fundamental strategy; and the balance was managed internally in quantitative, passive and experimental strategies.
Annualized returns of the global equity portfolio for periods ended June 30 were one quarter, 4.3% (benchmark, 4.3%); one year, 18.6% (18.1%); three years, 5.5% (5.3%); and five years, 10.5% (9.8%).
About 40% of the entire TRS portfolio is managed internally across asset classes.