The $152.5 billion Texas Teacher Retirement System, Austin, received preliminary approval for a new asset allocation by its board of trustees during a meeting Friday.
Final approval for the changes to the strategic asset allocation and related investment policy changes is expected to take place at the board's next meeting Sept. 20. Implementation of the new investment structure would happen over a six-month transition period.
The new strategic asset allocation would change the target weightings to the fund's three broad portfolios as follows: global equity to 54% from 57%; real return to 21% from 22%; and stable value, which includes U.S. Treasuries, stable value hedge funds and absolute return strategies, to 21% from 15%, board meeting documents showed.
Within the $83.2 billion global equity portfolio, the biggest change is the elimination of a 4% target weighting to directional hedge funds, which totaled $5.8 billion as of March 31. The hedge funds will remain in the global equity portfolio and may be incorporated in the future to other asset classes within the portfolio, such as risk parity, TRS spokesman Robert Maxwell said in an email.
The target for the fund's private equity will rise a percentage point to 14%, but the target weightings for other sub asset classes in the global equity portfolio will remain unchanged with U.S. equity at 18%; non-U.S. developed market equities, 13%; and emerging markets equity, 9%.
In the $33.1 billion real return portfolio, the target allocations to real estate and energy/natural resources/infrastructure will each rise 1 percentage point to 15% and 6%, respectively, while the 3% target allocation to U.S. Treasury inflation-protected bonds will be eliminated.
Both sub-asset class portfolios within the $27.2 billion stable value bucket will be increased under the new strategic asset allocation with the target to U.S. Treasuries increasing to 16% from 11% and stable value hedge funds rising by 1 percentage point to 5%.
The target allocation to the fund's $7.9 billion risk-parity portfolio will rise to 8% of plan assets from 5%, a report from the board meeting illustrated.
The new asset allocation also includes for the first time, a specific target allocation of -4% to net asset allocation leverage, said Mohan Balachandran, the fund's head of multiasset strategies, during the board's Thursday investment management committee meeting.
Leverage will permit TRS investment staff to reduce the fund's exposure to the stock market by increasing investments in diversifying strategies without changing the asset allocation, Mr. Balachandran told trustees.
"Revising the trust's asset allocation is important because it represents the risk-return strategy by which TRS diversifies its portfolio," said Brian Guthrie, the fund's executive director, in a news release from the fund.