The Teachers Retirement System of Texas (TRS) with $153 billion in assets under management, unveiled the latest updates to its “Fleet” strategy—a term the system uses to describe its strategy of consolidating funds and its addition of staff, in order to save on fees over time—at its Board meeting last week. The idea behind the strategy was first formally presented to TRS’ Board in February, 2018.
As part of the strategy, Jerry Albright, chief investment officer for the TRS—which is the largest public retirement system in Texas, serving close to 1.6 million people—said that the pension plan is currently in the midst of finalizing its new private equity strategy, called “Private Equity Strategy 2.0,” which is a five-year plan that began earlier this year. The strategy is designed to execute more principal transactions or direct investments, as the fund builds on its partnerships with general partners (GPs), while furthering allocation to co-investments and other deals it can manage in-house in the private equity space. The initiative is being led by Eric Lang, senior managing director of external private markets at the System.
The TRS’s private equity portfolio had $21.31 million in AUM at the end of September, or 13.9% of the total Trust. The portfolio has produced one-year returns of 16.1%, which is 80 basis points over its private equity benchmark.
Since 2014, (the last time the Trust’s strategic asset allocation was approved by its board) TRS has had an annual target for a private market excess return goal of 155 bps. “The 3-year [historic return] is 179 bps, so it continues to provide a significant source of alpha for the Trust,” said Albright during the board meeting. “Our plan for increasing that part of the Trust is playing out well,” he added.
TRS conducted a revamp of its portfolio strategy in 2016, which was part of an initiative called Global Best Practices. The internal 2016 study recommended placing all of the fund’s public equity buckets under the direction of Dale West, senior managing director of public markets. The new system, which rolled out in Oct. 2017, focuses on a system of checks to ensure that its investments into public equity are routed effectively.
“With the revamp of our public equity portfolio in 2017, under Dale West and consolidating oversight of portfolios across the Trust, [in order to generate fee savings and efficiencies,] we continue to try to align ourselves with 100 basis points of excess return,” Albright continued. “We’re behind, so it’s a work in progress. We do plan to improve to make the goal there over time,” he said.
In terms of cost savings, TRS is focusing on core investments. “Principal investments are where the rubber meets the road. This is where we can achieve most of the cost savings associated with the Fleet,” Albright stated. “Our annual target [for the percentage of the Trust’s portfolio capital plan into principal investments] is 33%, and we’re currently at 35%–right after a slow start of 6% in Q1 and 27% in Q2. Transaction volume has been steep. It’s been exciting. It is the top of the market, so we’re very careful about what we’re doing,” he said.
Growth of the team, new hires
In terms of rounding out the investment team for 2019, “we are proud of the progress we’ve made, and we’ve managed to accomplish a lot in through what you might call our restrictions and our oversight in getting things done,” Albright said. The restrictions he referred to is a state-mandated 10% cap on budgeted staff increases for Texas state agencies. “Around hiring individuals, that’s where we are working very hard to get the resources on board that we need with the board’s full cooperation.”
Albright and Deputy CIO Jase Auby have been spending 60-80% of their time on filling those roles. “We want to hire very top notch talent that fits our culture. We have a big funnel [of applicants] coming in. As you know we’re searching for our [first] Emerging Manager [program] Director. It’s about to wrap up, by the way,” he said. The System is close to selecting five finalists for the position, which garnered 137 applicants. A decision should be made by early to mid-2019.
The System is looking to hire 32 staffers in total in FY2019. “Jase [Auby] and I meet with all the staff every other quarter to talk about strategy. We mentioned at our last meeting that right now our vacancies are very low. We have four vacancies, right now. If you look at our average over time, we usually have about 10 spots open. We’re relying so much on our support services, it is quite dramatic,” he said.
TRICOT team in London
Albright also took time to mention the successes of the System’s London-based team, TRICOT (Teacher Retirement Investment Company of Texas ), because a percentage of its principal investments have been made by this three-year-old team. “I would also like to report TRICOT continues to be additive in this way [producing alpha for the Trust],” he said. TRS opened the London office in Nov. 2015 to enhance its ability to expand its reach into UK and European private markets. “TRICOT has actually produced 15% of our principal transactions that have been approved, and they continue adding value to the Trust in a very good way, so we’re happy with that team. Internally, here at Texas Teachers, [the Austin team] has really stepped up activity with all the partners to continue to get transactions on board, so we’re seeing great progress with that as well,” Albright said.
To diversify its staff, TRS is also conducting outreach to universities and increasing outreach to historically minority colleges, such as Washington D.C.’s Howard University. The outreach had been suggested by some board members who expressed a desire to increase racial and geographic diversity and inclusion within its Investment Management Division, Albright said.