Trustees of the $29.1 billion Texas Municipal Retirement System, Austin, accepted the recommendation of the fund's investment staff to dismantle the fund's $1 billion core/satellite U.S. equity program, board meeting materials showed.
In 2012, the fund's trustees approved a plan to move to a structure with a core of passively managed U.S. equities and active satellite strategies from a passive-only structure. The belief at the time was that adding active equity to the passively managed U.S. equity portfolio would increase its performance potential and reduce risk, the board report said.
The U.S. equity core/satellite portfolio was built out 2013-15.
However, investment staff wrote in the report that they had lost conviction in some of the managers in the program because of relative underperformance over the past three to five years; client and asset losses; personnel and ownership changes; and higher net-of-fee costs because the fund is paying higher fees for active management while strategies underperform.
Staff estimated in the report that potential annual savings from the change will be about $5 million a year.
Trustees approved termination of three U.S. equity managers that were not identified in the report. The report did not say whether the terminated managers currently run active or passive strategies for TMRS.
Spokesman Bill Wallace declined to comment to an email request for the managers' names. The fund's investment personnel were not immediately available to discuss the changes.
Half of the $1 billion redemption will be moved into Northern Trust Collective Russell 3000 Index Fund-Non Lending and the balance into UBS U.S. Equity Minimum Volatility Index Collective Fund by mid-December.
As of June 30, TMRS had $3.3 billion invested in the Northern Trust Asset Management fund and $411 million invested in the UBS Asset Management fund.
Staff said in the report that the $500 million allocation to Northern Trust's index fund "will provide the portfolio the upside potential should the markets rally substantially from current levels," while the UBS fund will help to "protect the portfolio in case of a further downturn in the equity markets."
In the board report, staff said they will "focus on a new direction for the public equity portfolio" and will present an asset class review and recommendations for a new portfolio structure at the board's March 28-29 meeting.
Separately, trustees also approved a commitment of $50 million to Updata Partners VI at a meeting on Dec. 5, Mr. Wallace confirmed in an email.
Updata Partners' portfolio managers seek investment in growth-oriented U.S. technology companies active in business-to-business sectors including infrastructure and application software, software as a service technology-enabled services, digital media and e-commerce.
TMRS committed $50 million to the previous fund in Updata's fund family in 2016.
TMRS had 1.6% or about $465 million committed or invested in private equity as of Sept. 30.
