In-House Investing Is Paying Off for Texas Teachers

The pension fund’s public investments struggled during the first quarter — but its private investments shined.

Austin, Texas. (Alex Scott/Bloomberg)

Austin, Texas.

(Alex Scott/Bloomberg)

The Texas Teachers Retirement System’s most recent quarter was a tale of two markets, according to investment chief Jase Auby.

Speaking at the retirement system’s investment committee meeting on Thursday, Auby said that the pension fund’s public equity portfolio struggled during the first three months of the year — but private investments, particularly direct and co-investments, bolstered returns.

Still, as Auby had projected in March, the $148 billion retirement system lost 8.3 percent of its value during the first quarter, meeting presentation documents show.

According to a report from TRS’s investment consultant Aon, the underperformance was driven by active management within the retirement system’s public equities portfolio, as well as underperformance by its stable value and risk parity investments.

“We were 100 percent active management and it does make sense for us to begin to diversify away from active management and consider raising passive funds,” Auby said during Thursday’s meeting. He added that there is an opportunity to move into passive investing through the pension fund’s public equities allocation.

In other asset classes, though, the retirement system’s active, in-house investment management style is paying off.


Over the one-year period ending March 31, the private markets portfolio posted a time-weighted return of 8.9 percent. Over the three-year period, that return was 10.7 percent, and over the five-year period, it was 10.4 percent.

TRS’s principal investments, which include direct and co-investments, also posted strong returns over the three- and five-year periods, earning 12.2 percent and 11.9 percent, respectively.

“Alpha remains a story of two markets,” Auby said. “Private markets are our good news story. Public markets do remain challenged.”

This outperformance was especially apparent in the real estate sector, where TRS has been moving toward running more investments in-house instead of outsourcing.

According to the presentation, the real estate portfolio has reached a target allocation of 50 percent funds and 50 percent principal investments. Senior managing director Eric Lang, who oversees private markets, said this is the result of building up a staff that could manage this level of in-house investing.

“This is where building the fleet is significantly adding value,” Lang said during the meeting.

[II Deep Dive: How Texas TRS Is Coping With ‘Tremendous Volatility’]

Over the one-year period ending March 31, the real estate principal investments returned 10.5 percent. Over the three-year period, that return was 12.5 percent, and over five years, it was 13 percent.

“It’s all great news here,” Lang said of the real estate portfolio, adding that the “alpha is exceptional.”

Right now, however, the real estate market has “more questions than answers,” according the meeting documents.

Although interest rates, which make real estate investments more attractive to allocators, have fallen, return expectations and investment volumes have dropped too, according to the documents. The pension fund said it’s “too early to tell” where future rent levels will go, and what the impact of the stimulus package will be.