The Teacher Retirement System of Texas is now transitioning to its new five-year strategic asset allocation (SAA) but is still waiting to set up its long-planned presence in Asia, according to the $153 billion pension fund’s chief investment officer.

“[Establishing an office in Singapore] is very much an ongoing project that we’re assessing and considering doing,” Jase Auby told media on a call on Friday (January 17). “The process has taken a little bit longer than we anticipated, but [the time frame is] not out of the realm of what’s normal when you’re considering opening an office halfway around the globe.”

It is also perhaps to be anticipated given that opening an office in Asia is a hugely pioneering and expensive move for an American state retirement fund to justify – especially at a time of high tensions between China and the US.

Jase Auby

Indeed, President Donald Trump’s administration has suggested that US institutional investors should not be investing in Chinese assets amid the ongoing spat over trade and Chinese telecoms giant Huawei.

American senators had even sought to prevent the Federal Retirement Thrift Investment Board, a $590 billion state fund, from switching some $50 billion into stocks mirroring the MSCI All-Country World ex-US Investable Market Index, of which Chinese companies make up 7.6%.

However, Auby said that it made sense for Texas Teachers to have boots on the ground to help oversee its $22 billion of assets in the region.

A spokesman for Texas Teacher declined to comment on what might be holding up the Singapore move or specify a date for when it was likely to go ahead. “We have been targeting this year some time,” he told AsianInvestor by email.

Documents released by the fund in July suggest that the branch would house four staff initially, but the spokesman declined to say whether any hires had been made.

Former CIO Jerry Albright, who has been driving the Asia plans, will continue to lead the effort to open in Singapore in his new role as senior managing director for global investment initiatives, Auby said.

Texas Teachers is also thinking about expanding its London operation, he added, something that Albright will also be focused on, as well as being involved in mentorship and talent management internally.

Auby himself, meanwhile, will be managing the transition to the new five-year SAA (see chart below), under which private markets will account for 35%, up from 32%, while total equity exposure falls from 57% to 54%.

TEXAS TEACHERS' STRATEGIC ASSET ALLOCATION PLANS
(Click for full view; Source: Texas TRS)

Texas Teachers also intends to sharply ramp up the amount of direct – or principal – investment it does to 35% of its private markets portfolio, compared to 26% today and 9% in 2012. 

Such investments have performed particularly well for Texas Teachers. They generated an internal rate of return of 15.1% and 13.1% over three and five years, respectively, compared to 11.5% and 11.1% from private market fund commitments.

In addition, Texas Teachers is looking to reduce the amount it pays in fees. This is a key driver of its plan to nearly double headcount to 270 from 150 over five years; private market investing is labour-intensive.

The fund's move reflects similar plans at other asset owners to do more co- and direct investing, such as various sovereign wealth funds, California State Teachers' Retirement System and the Investment Management Corporation of Ontario

Perhaps reflecting is intention to insource more, Texas Teachers does not plan to add any more strategic partners for private market investments to the duo it currently works with (Apollo and KKR), said Auby. “The irony of having strategic partners is that the more you add, the less strategic they are.”

The fund’s private market activities are largely in developed markets, he added. “We have been a little more cautious going into emerging markets.”

It is, however, positive on emerging market stocks and is retaining its 9% allocation. Its willingness to do so is notable, given that this portfolio, along with its Eafe (Europe, Australasia and the Far East) allocation, has “not paid off” in the past 10 years, heavily lagging US equities, Auby said.

The ongoing commitment underscores Auby's belief that underperformance will change. 

“We are cautiously optimistic about the ability for emerging markets and non-US developed markets to have a better decade ahead,” he added.