Earlier moves made by the Employees' Retirement System of Texas, Austin, to reduce risk in the $26.5 billion fund helped to cushion the blow from COVID-19 related market declines with staff now looking to deploy dry powder at attractive opportunities in alternative strategies.
Assets declined by $2.9 billion or 9.9% to $26.5 billion in the quarter ended March 31, but CIO Charles Thomas "Tom" Tull said in an interview: "We've done very well working through this environment primarily because we began reducing risk in the portfolio nine months prior to March ... we thought the equity market was overvalued."
ERS staff reduced public equity holdings to 34% of plan assets over the period from 36% in June, which helped the fund's performance, Mr. Tull said.
Proceeds from the reduction in the portfolio's equity weighting helped the fund increase liquid assets, particularly U.S. Treasury bonds, to about 16% of assets and that ensured the fund could cover benefit payments during the first quarter.
Mr. Tull said the fund's preliminary return in the first quarter was -9.9%. Returns of the fund's illiquid alternative strategies lag by at least one quarter.
Investment staff began redeploying capital into public equities through S&P 500 futures contracts when the U.S. market was down 30% in March and took advantage of low prices by investing in more equities in April.
The ERS portfolio looks much different today than it did during the financial crisis in 2008, Mr. Tull said, when the fund had about 67% of defined benefit plan assets in equities and very little in alternative investments.
ERS is tapping the dry powder in the fund's liquidity sleeve to commit to great opportunities resulting from global market dislocations in private equity, real estate and infrastructure.
The fund's most recent investment report showed that at the end of February, ERS had about $4.3 billion in private equity; $2.6 billion in real estate; and $900 million in infrastructure.
Of particular interest to the investment team are promising sectors likely to benefit from the post-pandemic market including technology, health care and possibly education, Mr. Tull said.
"We're finding that this is a good time to talk with our existing managers about their strategies. We're finding that they are somewhat more accommodating about deal terms," Mr. Tull said.