Texas Teacher Retirement is considering almost doubling the size of its investing team so it can cut expenses by managing more of its money in-house.
Jerry Albright, chief investment officer, has proposed adding 120 people over five years, which would increase the team to almost 270 people, according to a video of a board meeting posted to the fund's website in late February. That would allow the $150 billion pension fund to buy more assets directly, cut external fund managers and slice fees by at least $600 million, Mr. Albright told the board.
"It will show up as reduced costs," Mr. Albright said at the Feb. 15 board meeting. "We feel we can get there if you give us the resources."
Executives at a number of public pension funds say they can cut fees and produce equal-to-better returns by picking investments themselves. The $355.4 billion California Public Employees' Retirement System handles 70% of assets internally, mostly by trading stocks and bonds, and has considered developing expertise in private equity, real estate and infrastructure.
Mr. Albright joined Texas Teachers in 1994 and was promoted from deputy CIO last year after the departure of T. Britton Harris IV, who spearheaded changes to the investment program in the past decade. Mr. Harris became CEO of the University of Texas Investment Management Co. — located about six blocks from Texas Teachers' offices in Austin.
Headcount at Texas Teachers has been growing on pace with assets as the fund has shifted to alternatives from conventional stocks and bonds, Mr. Albright said at the meeting. The investing team employs almost 150 people and, without additional authorization from the board, might add another 50 in the next five years, he said.
The new hires likely would be based in Austin but the proposal is still being refined, according to the fund.
While Texas Teachers has generated $11 billion of returns in excess of its benchmark over a decade, it has one of the highest cost structures among peers because it's more dependent on external managers, Mr. Albright said. The average cost was 98 basis points, which would equal about $1.4 billion in fees a year, he said.
Mr. Albright said the pension fund could cut the cost to 72 basis points through the plan he has developed, which emphasizes hiring analysts and technology staff to support the investment team. He said he wants to increase direct investments in private markets to 30% from 20% of the portfolio, and boost public markets to half from 40%.
The average cost of managing investments at Texas Teachers is twice that of the top-performing C$180 billion ($137.4 billion) Ontario Teachers' Pension Plan, which employs more people and makes significantly more direct investments, the board was told. Texas Teachers could move its portfolio to more closely resemble the Canadian model, Mr. Albright said.
Texas Teachers' proposal was met with some skepticism. Christopher Moss, a member of the board since 2010, said at the meeting he was concerned the cost savings wouldn't necessarily translate directly into boosting the pension fund's size.
"What happens if we're wrong?" asked Mr. Moss, who runs a financial advisory firm in Texas.
Brian Guthrie, Texas Teachers' executive director, told the board the proposal, which would also need approval from the state Legislature, was a first step and that he expects details of the plan to be fleshed out by June. He said the accelerated hiring "could be a huge shock to administrative costs," and it was important to show legislators how the benefits are measured.
"I'm glad you guys are looking at this," said Jarvis Hollingsworth, a lawyer who is chairman of the Texas Teachers board. The pension fund "has evolved," he said.