Fund bulking up to cut costs, get closer to more lucrative investments
Jerry Albright has an ambitious goal: Transform the Teacher Retirement System of Texas into a best-in-class global institutional investor.
The chief investment officer of the $145.4 billion defined benefit plan is not shy about singing its praises, labeling it the top U.S. pension fund in a report to the system's board of trustees.
Mr. Albright's priorities for the transformation of the investment management division include reducing investment costs through more internal management; increasing the size of teams globally sourcing principal investments, including co-investments, sidecar funds and direct investments in private market deals; and expanding operations and analyst employee support for senior managers.
Because the Austin-based fund has reached its resource capacity for both investment and operations staff, it is recruiting 63 new employees over three years to increase the headcount of the investment management division to 219.
TRS plans to hire a total of 32 people by Aug. 31, the end of the fund's fiscal year. To date, 18 people have accepted jobs or received an offer from the fund. The remaining people will be hired by 2021.
Mr. Albright said in a telephone interview that he likely will go back to TRS' board for approval to add another 60 or so new employees over the following two years for a total of 120 new staffers.
In addition to hitting an investment capacity wall, TRS also is running out of desks to accommodate current, new and future employees and plans to move the investment management division to new office space in Austin separate from the fund's headquarters.
TRS currently has one office outside Austin in London staffed by five people. The fund also is exploring whether to open an office in Singapore (Pensions & Investments, June 24).
The new investment management division employees will fill a job spectrum ranging from investment professionals to operations specialists, technologists, human resource and talent managers, accountants, lawyers, finance aficionados and compliance experts.
Most of the new hires will be junior-level associates, Mr. Albright said, noting that the fund's senior manager ranks already are well staffed. The new associates and analysts will bulk up internal capacity and support senior managers in all functional areas of the investment management division, he said.
In the principal investments unit, for example, with junior staffers holding down the fort, more experienced senior investment officers can more readily "get out of the office" to meet with investment managers and potential portfolio company targets, Mr. Albright said.
To prepare for the ambitious hiring spree, Horacio A. Zambrana joined TRS in September 2017 as head of talent management, and initiatives are underway to define career paths for investment management division employees. With so many new people joining Mr. Albright's fleet, there also is an orientation program to help acclimate new people. Mr. Albright participates in a Meet the CIO program to give new staffers an overview of the investment division.
The genesis of the "Building the Fleet" program, as it's labeled internally, began two and a half years ago when Mr. Albright, then deputy CIO, began a review of the investment management division.
Over the previous 10 years, Mr. Albright said investment officers had learned how to manage assets by working closely with external money managers, especially strategic partners that provided advice and counsel on investment management processes, portfolio construction and customized research.
"I realized that we had the expertise to do more ourselves, to manage more of the portfolio internally," Mr. Albright said.
A yearlong review helped Mr. Albright and staff understand what they could and couldn't do internally, he said, noting "if we can't achieve the expected return internally, we will use external managers."
The sole purpose of internal management is "manage assets more cheaply" to increase the fund's net alpha generation, Mr. Albright said.
The bottom-line goal is a cumulative $1.5 billion in net fee savings in the first five years of the new investment division structure, he said.
The board approved Mr. Albright's program in February 2018, and after receiving funding for the staff expansion from the Texas Legislature, hiring started after the beginning of its current fiscal year on Sept. 1.
Robert Maxwell, a fund spokesman, declined to provide the amount the state Legislature approved for new hires.
Texas TRS portfolio managers already internally manage one-third of plan assets — about $49.7 billion — in public market securities.
As of Dec. 31, 33.5% of the pension fund was managed internally. Of that, 11.5% was managed internally in U.S. fixed income; 10.8% in international equities; 6.5% in U.S. equities; and 4.7% was managed in other public markets strategies including risk parity, commodities and cash.
Some of the principal investments portfolio is managed internally, but assets aren't included in the fund's internally managed asset total, said Mr. Maxwell.
Mr. Albright declined to say what future internal management targets will be.
TRS' success in meeting targets set for the investment management division was mixed in periods ended Dec. 31, according to an update Mr. Albright presented to the investment committee April 25.
The excess return of the fund over its benchmark was a cumulative 71 basis points over the rolling three-year period ended Dec. 31, compared to the cumulative 100-basis-point target.
The return of the fund's active public market equity portfolio was below the benchmark by a cumulative 32 basis points for the rolling three-year period ended Dec. 31, compared to the cumulative 100-basis-point target excess return.
The percentage of public market equity managed internally was 54% as of Dec. 31, close to the 55% target allocation.
Private markets investments, in contrast, exceeded target goals, as the portfolio's cumulative return in excess of the benchmark was 210 basis points over the three-year rolling period ended Dec. 31. The target excess return was a cumulative 155 basis points, Mr. Albright's presentation showed.
Mr. Albright said during the interview that the fund's principal and private market investments have "done very well" and accounted for about 80% of the estimated cost savings of $46 million over external manager fees in the year ended Dec. 31. TRS' target savings target is $53 million per year.
Cost savings will be even greater when carried interest income from private market investment is realized in two years, Mr. Albright said.
The pension fund's asset allocation as of Dec. 31 was 54.6% global equity, including 15.1% of total assets to private equity; 22.2% real return, containing Treasury inflation-protected securities, real estate, energy, natural resources, infrastructure and commodities; 18.6% stable value, consisting of long Treasuries, stable value hedge funds and absolute return; 5% risk parity; 1.3% cash and -1.7% leverage.