Diversity and liquidity help Texas Teachers manage through crisis

The global impact of COVID-19 on global markets tested the mettle of the investment approach of the Teacher Retirement System of Texas, and the portfolio performed as expected, thanks to a high degree of diversification and ready liquidity, said Jase Auby, CIO of the Austin-based pension fund in an interview with Pensions & Investments.

Assets fell to an estimated $148 billion in the quarter ended March 31 from $163 billion as of Dec. 31 with an investment return of -8.3%, but the decline hasn't affected the pension fund's ability to meet benefit payments and to invest in new investment opportunities at bargain prices during rough market conditions.

"We were positioned pretty neutrally prior to the crisis, and we have a heavy emphasis on maintaining that neutral stance by focusing on rebalancing," Mr. Auby said.

When the coronavirus crisis hit global markets in February, the first thing the TRS investment team did was increase the pension fund's cash on hand to 3% from 2% while adding leverage by the same amount to maintain steady portfolio exposure, Mr. Auby said.

TRS has a zero to 10% (4% neutral) net leverage allocation within its portfolio. TRS sold bonds to buy public equities to rebalance the global stock portfolio to its 40% target allocation.

TRS' board raised the strategic asset allocation to long-dated U.S. Treasury bonds (19-year duration) to 16% from 11% in the fall of 2019, Mr. Auby said, noting that during the early phase of the coronavirus crisis "it was all about selling Treasuries. Prices were good during the coronavirus crisis for long-dated Treasury bonds."

To find fresh investment opportunities, Mr. Auby said the investment team may make to an overweight allocation to public equity especially in value and small-cap strategies given the "historic" decline in the market pricing of these securities and their likely rebound as markets correct. Actively managed strategies might also outperform once market volatility returns to more normal levels and might be another area of increased investment.

TRS may also tap its liquidity reserve to invest in credit, which "usually is near the top of everyone's list in a crisis," given low prices for both investment-grade and high-yield bonds as other investors deleverage their portfolios, Mr. Auby said.

Some of the pension fund's existing hedge fund managers that had been closed to additional investments prior to the pandemic crisis have reopened their strategies, and TRS topped up their mandates.

TRS investment officers also are analyzing the possible negative and positive long-term implications of the COVID-19 pandemic on investment sectors, including real estate, travel and leisure and health care. Mr. Auby said the potential retreat from globalization might accelerate in the aftermath of the coronavirus and create new geopolitical issues for investors.

Another important exercise for TRS' investment management division was to survey the fund's private market money managers, Mr. Auby said, noting "we really needed to know what our managers were doing in their portfolios. We had to be sure they could provide rescue capital to companies in their portfolios if necessary, and we urged our managers to be very transparent."

TRS received responses from every alternative investment manager and "didn't get any surprise answers," Mr. Auby said.

Since work-from-home mandates were instituted in Texas, the pension fund's internal investment team has managed $148 billion from their homes in and around Austin with just a slight slowdown in trading in U.S. Treasuries, Mr. Auby said, while public equities were "more easily traded" without hitches.

Like every other asset owner and money manager around the world, Texas Teachers still is evaluating its working arrangements when COVID-19 restrictions are lifted.

"Everyone here is so surprised that working from home has gone so well. There are many clear advantages. I feel more productive than ever, but I am missing seeing people and just saying hi," Mr. Auby said.

He warned, however, that "some things may start to fray. Meeting remotely has worked well, but it's much easier to mentor and develop the talents of junior employees or to foster continuous training and improvement of other employees when you're side by side."

Texas Teachers has hired several new employees after a successful remote recruiting process during the stay-at-home lockdown period, Mr. Auby said.