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June 22, 2020 01:45 PM

Illinois Teachers rebalances portfolio amid COVID-19 turmoil

Christine Williamson
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    Illinois Teachers' Retirement System, Springfield, invested or committed $2.3 billion to new investments or existing strategies, and terminated or redeemed a total of $2 billion from current managers, according to reports.

    A number of the changes were made as part of staff's "prudent rebalancing back to targets" during turbulent market conditions caused by the coronavirus outbreak since March 31, said R. Stanley Rupnik, CIO of the $50.6 billion fund, during the fund's June 18 virtual investment committee meeting.

    TRS investment staff have investment discretion and reported making the most changes in the system's $5.6 billion diversifying strategies portfolio with a total of $550 million of new investments and $1.1 billion of terminated assets. TRS' diversifying strategies portfolio includes hedge fund, risk-parity, volatility and alternative-risk premium strategies.

    Mr. Rupnik told trustees that some of the terminations and redemptions within the diversifying strategies portfolio were part of a "definite rotation within the book" and that continued market volatility highlighted the reasons for the changes in the portfolio's manager lineup.

    Mr. Rupnik did not publicly provide specific reasons for manager terminations during the meeting.

    Investments in the diversifying strategies portfolio included $200 million to Capstone Vol (U.S.), a volatility-oriented hedge fund strategy managed by Capstone Investment Advisors, a new manager for the fund.

    A total of $350 million in additional allocations was distributed among three existing managers:

    • Brevan Howard Asset Management received an additional $150 million for investment in its Alpha Strategies fund for a total of $383 million.
    • Graham Capital Management received another $100 million to bring assets under management in the Graham Quant Macro Fund to about $487 million.
    • Aspect Capital also received a top up of $100 million, increasing AUM in the Aspect Systematic Global Macro U.S. Fund to about $352 million.

    Four managers in the diversifying strategies portfolio received final redemption or terminations notices:

    • TRS redeemed the final $255 million managed by Bridgewater Associates in its Optimal Portfolio Fund, a risk-parity fund.
    • The remaining $167 million in the GAM Systematic Core Macro Fund was redeemed.
    • Kepos Capital was terminated for the full $200 million managed in the Kepos Exotic Beta Fund.
    • Carlson Capital Management was terminated for management of $161 million in its Double Black Diamond Fund.

    Partial redemptions were made from AQR Capital Management's AQR Multi-Strategy Fund XIV, reducing AUM in the fund by $100 million to about $315 million, while assets managed in Man Group's Man Alternative Risk Premia Fund were reduced by $100 million to about $91 million, and Grosvenor Capital Management's Monarch Fund was decreased by $75 million to about $241 million.

    Investment officers of the system's $6.5 billion private equity portfolio made a number of commitments to new funds offered by existing managers. The largest commitments were $200 million each to EQT IX, managed by EQT Partners, which currently manages a total of $125 million for TRS, and to Silver Lake Partners VI. Silver Lake currently manages $350 million for TRS.

    TRS committed $150 million to New Mountain Partners VI, managed by New Mountain Capital. The firm already manages $217 million for the system.

    Smaller allocations to new funds run by existing private equity managers were $100 million to Altaris Capital Partners' Altaris Health Partners V; $75 million to Visa Foundation Fund IV, managed by Vista Equity Partners Management; and up to $50 million to Pamlico Capital Partners V.

    Mr. Rupnik told trustees during the meeting that TRS' $12.6 billion global income has had a good deal of turnover since February as Scottie D. Bevill, senior investment officer for fixed income, "took profits" by selling some assets and rebalancing into other strategies.

    TRS also committed $150 million to PIMCO Corporate Opportunities Fund III, a new strategy for TRS, managed by Pacific Investment Management Co.

    The pension fund also made additional commitment of up to $250 million to the TRS Horseshoe Fund, an existing distressed situations separate account managed by PIMCO, which already manages about $400 million in the strategy.

    Beach Point Capital Management received an additional commitment of $100 million to the existing distressed corporate debt separate account it manages for TRS, Beach Point Sangamon Fund. The new addition will bring the total managed in the fund to about $312 million.

    TRS also committed $45 million to a new credit manager, Locust Point Capital, for investment in Locust Point Seniors Housing Debt II.

    The largest single termination TRS made during the latest round of investment changes was the termination of PIMCO for management of $600 million in the PIMCO Dynamic Bond strategy.

    Mr. Bevill didn't provide reasons during the investment committee for all of the terminations from the global fixed-income portfolio, but did stress to trustees that the termination of PIMCO's Dynamic bond strategy was because "it is no longer appropriate for the portfolio and there are better opportunities down the road."

    PIMCO manages a total of $1.5 billion in various strategies for the system.

    Other terminations from the global fixed income portfolio were Ramirez Asset Management for management of $250 million in municipal bonds and PGIM for management of $96 million in its EMLS Fund I, an emerging market debt fund. PGIM continues to manage $2.2 billion for TRS.

    Within the defined benefit plan's $8 billion real assets portfolio, investment officers committed up to $250 million to Brookfield Asset Management, a new firm, for investment in Brookfield Infrastructure Fund IV-B.

    Strategic Partners Fund Solutions, another new manager for TRS, was awarded a $200 million commitment for investment in Strategic Partners Infrastructure III. Strategic Partners is a subsidiary of BlackStone Group, one of TRS' existing managers that manages a total of $621 million primarily in real estate strategies.

    At the full board meeting on June 19, fund trustees also approved hiring Aksia TorreyCove, Meketa Investment Group and Stout Risius Ross for co-investment consulting services, pending a legal opinion about a Stout Risius Ross employee who may have a conflict working on behalf of TRS. TRS began the search for companies to assist the fund's staff with sourcing more co-investment opportunities in March.

    Stout Risius Ross and Aksia TorreyCove were among TRS' existing co-investment consultants, and Meketa is new. The firms will assist for five-year contracts beginning July 1.

    Trustees also approved the investment options for the system's new 457 plan which Carlton H. Lenoir, TRS chief benefits officer, said is set to go live Jan. 11.

    The fund offerings include the BlackRock Lifepath Index K Series target-date funds as the plan's default option.

    In the plan's capital preservation array are Vantagepoint PLUS Fund R10, a stable value fund managed by Vantagepoint Funds, and Vanguard Federal Money Market Fund, managed by Vanguard Group.

    In the core and diversifying fixed-income asset class are PIMCO Income Institutional Fund; BlackRock U.S. Debt Index Fund F; PGIM High Yield RG Fund; and PGIM Global Total Return RG Fund.

    Domestic equity options are BlackRock Equity Index Fund F; BlackRock Mid Cap Equity Index Fund F; and BlackRock Russell 200 Index Fund F. The plan's international/global equity option is BlackRock MSCI ACWI ex-U.S. Index Fund F.

    The plan's inflation hedge option is Vanguard Real Estate Index Admiral Fund.

    Socially responsible options include BlackRock MSCI ACWI ESG Focus Index Fund and an ESG fixed-income fund that is being created for TRS by existing defined benefit plan manager Garcia Hamilton & Associates.

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