America's fifth-largest pension fund doesn't invest in private credit — at all — but invests heavily in energy, including oil and gas, wind and solar energy companies.
The $181.7 billion Texas Teacher Retirement System supports 2 million teachers in Texas, active and retired, or 1 in every 20 Texans.
Jase Auby, the pension fund's chief investment officer, met with Pensions & Investments to discuss the retirement plan's strategic asset allocation; its support of oil and gas investing as other pension funds and endowments divest; and the reason why it avoids investing in the latest hot asset class — private credit, an exploding market that recently crossed the $1.7 trillion mark, according to Bloomberg.
While Texas Teachers is similar to many other state-run retirement systems, there are key differences.
"We look very similar to a lot of our peers, but we have key differences," said Auby at his Austin offices.
"We're a little overweight private markets, we're at about 40% private markets ... defined as private equity, real estate, energy, natural resources and infrastructure," he said. TRS also holds about 10% in hedge funds.
However, "We have a zero percent allocation to private credit, which is interesting because our peers have on the order of 10%. By and large, it's a very standard looking fund with those few key differences."
Why no private credit? Auby cites two main reasons: "We've very much followed the endowment model method of investing. Look at the origins of the model; it said either own equities or Treasuries; you shouldn't necessarily put business risk together with bond risk, to create a hybrid security called credit. Philosophically that's been behind the endowment model for many years."
Second, the median public pension fund has an assumed return hurdle of 7%.
"With interest rates so low for a number of decades, that's driven us all out of the credit markets. So even if we had wanted to be in credit, we would not have been able to," he said.
"Now we have this new thing, called private credit. Two things have happened; rates have gone up generally, so even liquid credit is starting to look more interesting. But private credit has found a way to boost those returns, by levering credit, as well as finding smaller borrowers who might pay a little bit of premium over public markets."
However, private credit's returns are offset by much higher fees, Auby said.
"In liquid credit markets, the fees are actually quite thin. In private credit, they're much higher. There's an ongoing debate, whether the advantages of that leverage and private borrowers that are more illiquid is enough to offset that additional fee burden in the private credit asset class. So we have a zero allocation to private credit. However we do view credit as an asset class to be invested in when there's a dislocation."
The last time was the global financial crisis in 2008-2009. At that point, TRS again had a zero allocation to credit, "then we ramped up to 8% allocation to credit right after the GFC. It was a great investment, a great thing we did. Then we had the discipline — this is the hardest part — to actually sell it all back down" to take profits.