Texas Teacher Retirement System, Austin, is reducing its exposure to China equities by half in order to improve diversification of its emerging markets equity portfolio.
The $184.4 billion pension fund's board at its Sept. 15 meeting approved its policy committee's recommendation to change the benchmark for its $14.8 billion internally managed emerging markets equity portfolio to 50% MSCI Emerging Markets index and 50% MSCI Emerging Markets ex-China index from 100% MSCI Emerging Markets index, according to a webcast of the meeting.
The change, which will be implemented over a six-month transition period, is being made in order to reduce the portfolio's allocation to China in half given the country's outsized 35.4% weight in the benchmark, which is twice as much exposure as the next highest-weighted country, according to a presentation included with Sept. 15 policy committee meeting materials. Lowering the weight will improve diversification in the emerging markets equity asset class, the presentation said.
The transition is being implemented over the course of six months to help "minimize adverse trading impacts," according to the presentation.
As of June 30, the pension fund's actual allocation to emerging markets equities was 8%; its interim policy target is 8.8%, and its long-term policy target is 9%.
In the current benchmark, China represents 35.4% of the portfolio, or about $5.24 billion in pension fund assets as of June 30, and the adoption of the new benchmark will reduce the exposure to China equities to 17.7%, or about $2.62 billion in assets as measured on June 30.
The new custom benchmark will change the top weighting in TRS' benchmark to Taiwan at 18.5% of the index, up from 14.5%, followed by China, and then India at 16.2% (up from 12.7%) and South Korea at 14.3% (up from 11.2%). The remaining weights in the new custom benchmark are 7.5% rest of Asia, 6.2% Brazil, 5.4% Saudi Arabia, 4.6% Africa, 4% rest of Gulf Cooperation Council, 3.8% rest of Latin America and the rest to Europe.
TRS spokesman Rob Maxwell could not be immediately reached for further information.
