The Teacher Retirement System of Texas’ board voted to change up the $153 billion retirement plan’s strategic asset allocation at its Friday meeting.
The fund will increase its private equity, real estate, and energy, natural resources, and infrastructure holdings by one percentage point each. Private equity will go to 14% of the total investment portfolio (from 13%), real estate will become 15% (from 14%), and energy, natural resources, and infrastructure will become 6% (from 5%).
The increases are meant to protect the plan from equity risk, as a stock market downturn in the near future is a growing concern for investors.
“Revising the trust’s asset allocation is important because it represents the risk-return strategy by which TRS diversifies its portfolio which includes investment vehicles such as stocks, bonds, hedge funds, or real estate,” said Executive Director Brian Guthrie.
Texas Teachers will also hedge stock risk by boosting its exposure to US Treasuries, stable value hedge funds (also by one point, to 5%), and risk parity strategies (by three points, to 8% of total). Risk parity volatility will also change to 12% (from 10%).
Its directional hedge fund benchmark will also shift to compare performance to that of public equity indices.
The board is looking to borrow money to underwrite some of these safer investments. This will allow the plan to “invest in a more balanced portfolio of assets without sacrificing returns,” rather than putting more money into the riskiest assets.
“Leverage allows us to reduce our exposure to the stock market by adding to diversifying assets such as US Treasuries without lowering our overall return expectation,” said Mohan Balachandran, head of multi-asset strategies.
Every five years, the retirement system conducts a strategic asset allocation study to determine some of its investment targets, concurrent with the impact of changes within the markets.
At its September meeting, the fund expects to amend its investment policy statement, which will start a six-month process for assets classes to adjust to their new targets. Implementation will begin October 1.
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