Texas Teachers gets A-plus for execution of succession plan

Continuity is the watchword for Jase Auby, who on Jan. 1 will become the chief investment officer of the sixth-largest U.S. pension fund, the Teacher Retirement System of Texas.

Mr. Auby said that his priorities as the next CIO of the $157.6 billion Austin-based fund will not deviate far from those of his predecessor, Jerry Albright, senior managing director, who will remain at the fund for up to a year as senior managing director and head of global investment initiatives, to oversee large strategic projects.

"We've spent the past two years laying the groundwork for this transition and change is not part of the immediate future. The informal succession (training) started in 2016 when the board approved a succession plan," Mr. Auby said in his first interview since the fund's trustees approved his promotion from deputy CIO at a Dec. 13 board meeting.

Mr. Auby said his priorities for the investment division are:

• An ambitious recruitment drive that will increase the division's headcount to 275 from 150 over a five-year period to strengthen the system's culture and investment capabilities. Over the first year, 27 new employees were hired as part of the system's Building the Fleet initiative and five open positions currently are in the process of being filled.
• Significantly increasing the number of direct investments in private market deals and raising the amount managed internally in public market securities globally. A concentrated focus on technology and operations development will assist staff in this endeavor.
• Pursuing investment innovations such as expanding internally managed risk-parity strategies, engaging more closely with money managers to generate more direct investments and further restructuring of the system's global equity portfolio.
• Adhering to the system's cultural values, known internally as The Texas Way, will continue, including focus on making wise decisions, candor, communication, accountability, transparency and alignment with beneficiaries of the defined benefit plan.

Mr. Auby told trustees after they approved his appointment that "this is truly the opportunity of a lifetime and I am absolutely prepared for it," a webcast showed.

Rather than appoint a deputy CIO, Mr. Auby said in the interview that he will rely on the system's existing executive committee for support and advice.

"The executive committee has the ability to speak with one voice, representing five people," which will better align communications across all the units of the investment management division, Mr. Auby said.

The committee has been expanded to five senior employees from the four who served under Mr. Albright. Existing committee members Sylvia Bell, chief operating officer; Katy Hoffman, chief of staff and chairwoman of the internal investment committee; and Mr. Auby have been joined by Eric Lang, senior managing director and head of private markets, and Dale West, senior managing director and head of public markets.

Mr. Auby said one significant difference between his management style and Mr. Albright's is "a much bigger focus on external visibility," noting that he expects that about 25% of his time will be spent on external affairs, 25% devoted to strategic issues and the remaining 50% focusing on engagement with TRS employees and communications.

In terms of his own promotion to CIO, Mr. Auby said the succession plan is unusual compared to other U.S. public pension funds in that it identifies specific existing employees to replace individuals who leave the system.

"Succession planning is a very important process for public pension funds and it's something we advise pension funds to create," said Frederick "Rick" Funston, managing partner and CEO of Funston Advisory Services LLC, Bloomfield, Mich., a governance consulting firm.

"Many public pension funds have an emergency succession plan in place for the executive director and CIO positions, but because of civil service constraints, can't groom a successor for a position that should be open to competition. You can't approach succession by an internal employee individual explicitly unless there's a named deputy executive director or CIO," Mr. Funston said.

The Texas TRS succession plan was developed in 2016 by then-CIO T. Britton Harris III and Mr. Albright, who was then deputy CIO.

Messrs. Harris and Albright "had the foresight to look 10 years ahead" to plan for a smooth CIO succession that would maintain continuity for the investment management of the defined benefit plan, Mr. Auby said.

Mr. Auby joined the pension fund in 2009 as chief risk officer and head of the risk group. He was promoted to deputy CIO in the summer of 2017 to replace Mr. Albright, who was named CIO after Mr. Harris moved across town to the University of Texas/Texas A&M Investment Management Co. to become president, CEO and CIO.

The succession plan for the Texas TRS investment management division assured a smooth transition for Mr. Auby's tenancy of the CIO position, sources said.

"TRS is a high-performing team with a very carefully thought-out transition plan approved years in advance of any leadership change at the top. As a result, when each leader decides that it is time to move to another challenge or reconfigure their personal lifestyle, the upcoming leader has already been approved, has committed to the culture and to the specific philosophy and processes that are central to a successful and sustainable fund," Mr. Harris said in an email.

Mr. Harris said Mr. Auby was identified three years ago as successor to the CIO role and "has been trained on the extra responsibilities that he is taking on, has proven that he is highly capable, is respected throughout the organization and is, thus, ready to go. He is going to do very well."

Mr. Harris oversees investment of a total of $36.5 billion at UTIMCO, of which $30 billion is in the UT system's two educational endowment funds.

TRS' managers, who likely have endured some more stressful CIO transitions among their long-term clients, recognized the ease of this transfer of investment oversight.

"While every leader hopes to have a seamless CIO transition, very few are this smooth. It is a real credit to Jerry, Jase and the board leadership to have delivered this for the TRS team and the members of the trust who rely on them," said George H. Walker, chairman and CEO of Neuberger Berman Group LLC, New York.

Neuberger Berman managed $2.1 billion as of Sept. 30 as one of TRS' four public market strategic money manager partners. The firm managed a total of $339 billion as of Sept. 30.

Another Texas TRS strategic partner for public markets, Morgan Stanley Investment Management, New York, also praised the outgoing and incoming CIOs.

"As a long-standing partner of TRS, we have seen their first-class talent management program, including their well-organized and seamless succession planning," said Daniel A. Simkowitz, head of Morgan Stanley Investment Management, in an email.

"Jerry Albright has been an excellent CIO, driving TRS to be both innovative and effective. As their new CIO, Jase Auby will certainly keep TRS as a model to be emulated and an excellent steward of capital on behalf of educators in Texas," he said.

Morgan Stanley Investment Management managed a total of $507 billion as of Sept. 30, of which $2.1 billion was in the strategic partnership strategy managed for the pension fund.

Mr. Auby is assuming oversight of a defined benefit plan that has outperformed its benchmark over longer time periods.

As of Sept. 30, the fund returned 1.6% in the three-month period (benchmark, 1.3%); one year, 5.9% (6%); three years, 8.7% (8%); five years, 7.1% (6.6%); 10 years, 8.8% (8.2%); and since inception on July 1, 1991, 8.6% (8.1%).

During a Dec. 12 committee meeting, Mr. Albright reported that the excess return of the trust over its benchmark return on a three-year rolling basis was 69 basis points in the quarter ended Sept. 30. The target is 100 basis points.

The plan's private markets strategy stood out in the third quarter having produced 215 basis points of excess return on a rolling three-year basis compared to the 155 basis point target for the asset class.