I’m sure you’ve noticed some of the fancy moves Texas Teachers’ has been making lately. First, there were two $3 billion commitments to Apollo and KKR, which were unique and innovative mandates specifically devised to minimize fees and improve terms. More recently, it was announced that the $100 billion public pension had made a direct equity investment in Bridgewater, the world’s largest hedge fund. This is some creative stuff, which merits further exploration.
But I’m not all that interested in the specifics of the deals -- there’s been plenty of ink spilled on that already -- no, what I’m really interested in is how a ‘stodgy’ US public pension fund has managed to be this innovative and creative, because I can assure you...it’s not easy. In fact, I’d argue that the guiding principles of US public pensions literally encourage a lack of innovation. Take the prudent man rule: It guides much of the behavior of these funds by suggesting that they try to do...exactly what everyone else is doing. In other words, be boring and unoriginal. So the question is this: How is Texas doing something different?
For some insight, I direct you to Exhibit A: A 17 minute video of the Texas Board actually debating and then approving the Bridgewater transaction. I think it’s quite a telling video; one that anybody interested in the investment decision-making of these Giants should watch (i.e., me). Indeed, you’ve got a public Board made up of expert and non-expert Trustees that are being asked to consider a unique and opportunistic investment that clearly strays from the fund’s comfort zone. In fact, it was such a stretch for the fund that the Chair of the Board actually voted against the investment in Bridgewater. So, while Texas may be making innovation within public pension funds look easy, appearances may be deceiving.
For example, one of the big challenges in all public pensions is getting non-expert Trustees up to speed on innovative transactions. It can be painstaking and sometimes – let’s be honest – impossible to give all board members the necessary comfort level to make an informed investment decision. Interestingly, this specific topic comes up in the meeting, which...from the perspective of a nerd at least...is really cool. You don’t often have Board members asking each other about their competency while being videotaped in a public forum.
Anyway, part way through one Trustee (with a finance background) asks another Trustee (who is an educator without a grounding in finance) how she feels about assessing these sorts of out of the box opportunities. Her response? “I have 100% and complete and total confidence in our investment team.” In other words, while this transaction is outside of her comfort zone, she trusts the pension fund’s staff to do the right thing – to do what’s right for the members.
While I’m sympathetic to this response, I have to say...I’m not sure that passes muster. Is this Trustee actually capable of holding staff accountable? I’m not so sure. It seems to me that Texas’ ability to innovate may be as much about ‘trusting board members’ as it is about ‘sophisticated board members’. But pensions need to have Boards that can play along with the staff to minimize agency costs.
Notwithstanding, it's also clear that the Board understands the importance of having a highly competent and sophisticated staff, which (i'd argue) is a huge step in the right direction. Indeed, this theme comes through throughout video, as Board members routinely come back to the staff's sophistication. That's very positive. And that's probably why there is this strong bond (trust) between Trustees and staff.
But a sophisticated staff is only one ingredient in the 'good governance recipe'...a savvy Board should be in there too. Still, I give all the credit in the world to TRS for doing some really creative things.
