The radical transformation of Texas Municipal Retirement System's defined benefit plan from a traditional 60%/40% indexed model to a broadly diversified investment portfolio reduced the potential damage of COVID-19 market impact on the $30.5 billion pension fund in the first quarter.
T.J. Carlson, CIO of the Austin-based pension fund, said in an interview with Pensions & Investments that his job when he joined the fund in November 2013 was to modernize the portfolio and create a more sophisticated approach to managing the defined benefit plan. He acknowledged that he has "a fix-it kind of mentality," which suited the new job well.
Mr. Carlson came well prepared to TMRS, which is his fourth tour of duty as a CIO and is the largest pension fund he has overseen to date. He previously was CIO at the $13.4 billion Kentucky Retirement Systems, Frankfort, and Marshfield Clinic Health System Inc., Marshfield, Wis. (the asset size for the clinic was not available). His first CIO role was at the $16 billion West Virginia Investment Board, Charleston.
In his nearly seven-year tenure at TMRS, Mr. Carlson and his investment team, with the backing of the board of trustees, reshaped the defined benefit plan portfolio.The public equity allocation was halved to a 30% target with a mixture of active and passive strategies. Fixed income was reduced to a 30% target with 10% in core fixed income and 20% in public and private non-core fixed income, including high-yield, opportunistic, direct lending, bank loans, collateralized loan obligations and structured credit.
Mr. Carlson said TMRS only began investing in alternative investments around the time he joined the pension fund and new target allocations of 10% each in hedge funds, real return, real estate and private equity were added. Investments and commitments in the first three alternative categories are at or near their target allocations, but private equity was only at 3.5% as of March 31.
"Our asset allocation is a little different than other funds with 30% in equities, 20% in non-core fixed income and big chunks of private equity, real assets and other alternatives," Mr. Carlson said.
"The asset mix has helped us hit our 6.75% assumed rate of return over 10 years," he said, adding that the combination of "a lot less equity risk and forward-looking volatility of 9% compared to 12% for most public pension funds created downside protection for the portfolio."
TMRS' net return in the quarter ended March 31 was -8.6% compared with median returns of -12.5% to -13% for other pension funds, Mr. Carlson said, adding that TMRS outperformed the median pension fund return by 400 basis points in the quarter.
"The first quarter of 2020 was the proof in the pudding. The asset allocation worked phenomenally well in the quarter," he said.