Texas TRS avoids thematic calls amid macro worries

The $151 billion pension fund’s CIO says it’s “hard to be optimistic” on global markets right now. Experts at firms such as Blackstone and UBS are also concerned.
Texas TRS avoids thematic calls amid macro worries

The Teacher Retirement System of Texas is holding its asset allocations steady due to the heightened economic uncertainty as international trade tensions and European political risks grow.

Jerry Albright, chief investment officer of the $151 billion pension fund, said it is holding its allocations fairly close to their targets (see figure below) and avoiding making calls on particular themes.

“It’s hard to be optimistic across the globe in the current environment,” he told AsianInvestor in an interview late last month, noting the increasingly challenging political and economic backdrop.

In addition to the trade concerns as US President Donald Trump threatens to unilaterally raise tariffs, which European and Chinese officials on Monday warned could spark a global recession, and the populist backlash in parts of the European Union, markets are having to adjust as the era of super-easy Western monetary policy gradually comes to an end.

Rising US interest rates (the last hike being on June 15) and the rollback of US quantitative easing have hurt emerging markets in particular this year as capital is repatriated, and the trend looks set to be extended. Not only is the US Federal Reserve expected to continue hiking rates, the European Central Bank has also announced that it intends to end QE by the end of 2018.

Texas TRS, the US state's biggest retirement fund, has concerns about a potential American trade war with China and its likely detrimental effect on financial markets, Albright said. He cited the pension scheme’s $22 billion of assets in Asia, where it is considering setting up an office.

Still, the fund remains bullish on the US. Its economy offers particular appeal when set against Europe’s political turmoil, noted Albright. Italy is now governed by a coalition of anti-establishment parties while considerable uncertainty continues to swirl around the UK’s looming exit from the EU.

Texas Teachers' asset allocation (policy vs actual), as of August 31, 2017
(Click for full view. Source: Texas TRS)

Texas TRS has a "battle plan" ready in the event of certain developments, Albright said. It has accounts at the ready, for instance, to raise its credit allocation in response to a change in the economic environment. “They’d sit there unfunded until the time is right,” he said.

Indeed, Texas TRS plans to increase its exposure to private credit. It has a 3.5% allocation, invested both directly and through strategic partnerships with alternative asset managers such as Apollo and KKR, and it wants to raise this to 5% over three to five years.


Albright is not alone in publicly fretting about the escalating trade tensions. By implementing tariffs on steel, aluminium and certain manufactured products, the Trump administration has provoked Europe, Mexico and Canada and put the North American Free Trade Agreement in jeopardy, Byron Wien, vice chairman of private wealth solutions at private market investment giant Blackstone, said.

Taking action that isolates the US from its trading partners rather than trying to improve relationships through negotiation is “hard to understand”, wrote Wien in a note on Friday.

While a tough position against China is warranted in light of “a number of legitimate grievances”, Wien said, Trump will not want to sour what he believes to be a good relationship with the Chinese president, Xi Jinping.

Not only is China destined to become the world’s biggest economy but it is working on building up militarily in the South China Sea and Indian Ocean, noted Wien. One third of global shipping, worth nearly $5.3 trillion annually, passes through the South China Sea, he added.

“For these reasons, a sensible approach is for the US to try to have a working rather than an adversarial relationship with the Chinese leadership,” Wien said. “This is only likely to be achieved through judicious compromises.”


UBS has similarly expressed concern over the evolving trade disputes and rollback of stimulus, and also noted their likely negative repercussions for emerging markets.

In a note by Mark Haefele published on Friday, the Swiss bank's CIO of global wealth management cited the asymmetric risks flowing from the heightened trade tensions as well as a potential slowdown in eurozone growth as the ECB stops QE and the US economy overheats.

“Synchronised global economic growth has recently given way to more US-biased global growth,” Haefele said. “As a result we prefer to reduce positions vulnerable to dollar strength. We are closing our overweight [emerging market] equities and halving our [emerging market] sovereign bond exposure.”

He did not provide specific figures on portfolio allocations.

UBS remains overweight global equities, he said, but is prepared for higher volatility and tail risks through countercyclical positions, such as an overweight in 10-year US Treasuries.

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