Texas Teachers Increases Exposure to Private Markets

The pension fund is making larger allocations to private markets and bonds, according to its CIO.

Illustration by II

Illustration by II

The Teachers Retirement System of Texas has made some changes to the way it invests — just in time for its new investment chief to take the helm.

Chief investment officer Jase Auby said Friday in a phone call with media the pension fund has increased its exposure to private markets to 35 percent, from 32 percent, after completing its strategic allocation study last year. That’s a relatively high allocation compared to its peers.

The private market allocation is “much closer to what an endowment might have than what a pension fund might have,” said Auby, who took over as CIO at the beginning of the year. “We are a good outlier there.”

Over the past ten years, private equity has been the best performer for the fund, while real estate has been the third-best performer, according to Auby, who was previously deputy CIO at the pension.

The new CIO said he’s not worried about concerns other allocators and investors have raised that private equity could be overvalued.

“While it is reasonable to expect that as the industry matures, returns might come down, the asset class is still one we’ll focus on for the future,” Auby explained. “One key to outperform private equity is public equity is bringing down fees.” He said the fund is “always vigilant about how we deploy those precious fee dollars and what we pay private equity managers.”

Texas Teachers made other changes following its allocation study, which revealed it should add more balance to the portfolio by reducing its reliance on equity premia, according to Auby. To do that, Texas Teachers added to its risk parity allocation, which now stands at eight percent – one of the largest dedicated risk parity allocations for any U.S. pension fund, he said.

The pension fund also increased the volatility target within its risk premia portfolio to 12 percent from 10 percent, according to Auby.

In another major change following the study, Auby said the pension increased its allocation to bonds to 16 percent from 11 percent. This allowed the fund to reduce the portfolio’s public equity investments, he said.