The $150 billion Teacher Retirement System of Texas (TRS) is adopting a Canadian pension strategy in the near future as it plans to nearly double its in-house investment team in favor of cutting external management costs.
A proposal from the fund’s CIO, Jerry Albright, at its February board meeting could see the Austin-based pension increase its team by 120, bolstering the internal investment team to 270 members by 2023. The meeting was published on Texas Teachers’ website late last month.
According to Bloomberg, the external manager-cutting move grants Texas Teachers access to more direct asset allocation, saving a minimum $600 million in fees.
“It will show up as reduced costs,” Albright said at the meeting. “We feel we can get there if you give us the resources.”
Although the proposal is still being tweaked, new staff is expected to be in Austin, and without any additional board authorization, TRS could add 50 members to its investing team within the next five years.
Due to a dependency on external managers, the fund has one of the highest cost structures among its peers—double the costs of the Ontario Teachers’ Pension Plan. Albright noted that the average cost was slightly under 1% of its $11 billion returns in excess of its benchmark over the past 10 years. This equates roughly $1.4 billion in annual fees.
Through Albright’s plan, which seeks to hire more analysts and technology employees to back the investment team, the costs could drop to 72 basis points. Bloomberg reports Albright’s targets for direct investments are public and private markets by 10% each. Under the plan, public market investments would grow to 50%, and private markets will become 30% of the portfolio.
There were some who questioned the legitimacy of Albright’s goal for the plan to adopt elements of the Canadian model. Bloomberg reports that board member Christopher Moss and Executive Director Brian Guthrie cited issues with cost savings and simultaneous team expansion. Guthrie was concerned that the hiring spree would “shock” administrative costs.
The proposal will need approval from the state legislature before any steps can be taken. Guthrie expects the kinks of Albright’s proposal to be worked out by June.