The selection of investment managers contributed almost three-quarters of the 168 basis points of excess returns the $146 billion Teacher Retirement System of Texas generated in the 12 months ended September 30, 2017.
Individual manager outperformance added 122 basis points of outperformance as Texas Teachers posted a 12.9 per cent return for the year, exceeding its benchmark of 11.2 per cent.
In a presentation to the fund’s board this month, Aon Hewitt Investment Consulting partner Steve Voss said this was Texas Teachers’ second-strongest rolling one-year return ever, “second only to roughly a 2010 timeframe, when markets were just starting to improve following the crash [and] you had a lot of credit investments that were” excelling.
Individual managers of real-asset portfolios did “exceptionally well”, Voss said, along with private equity managers, directional hedge funds and stable-value hedge funds – “all added value quite notably above their benchmark”.
About 20 per cent of Texas Teachers is invested in real assets, where the managers the fund selected returned 10.9 per cent for the year to September 30, compared with the benchmark of 6.1 per cent.
The bulk of those real assets are in real estate and energy, natural resources and infrastructure.
“Those areas have done exceptionally well,” Voss said, adding that the fund’s investment management division (IMD) has done “a great job of adding value and finding good managers in that space”.
Voss said asset allocation had also helped the fund exceed its benchmark; for example, the decision to underweight US Treasury bonds contributed 49 basis points of outperformance.
There was lost value as well. Over the year, the fund was overweight absolute return strategies, which cost about 14 basis points of value. Overall, however, asset allocation contributed 41 basis points of the total value added for the year.
“The average underweight the last year for US Treasuries has been -2.3 per cent,” Voss said. “The decision IMD has made to underweight Treasuries has had quite an effect; it’s had a half-per cent impact for this past year. That one decision alone has been remarkably additive.”
Voss warned against letting the current low-volatility environment cause complacency to creep in and lull investors into accepting investment risk that might be “greater than one should be taking on”.
“Volatility has been at an all-time low,” Voss said, and for the last three years has been about 5 per cent for the fund’s benchmark portfolio.
“I don’t recall a time…when we’ve seen volatility as low as this,” he said. Looking forward, volatility is expected to be significantly higher, in the 10 per cent to 14 per cent range.
“It’s been a very quiet, low-vol period,” Voss said.
The value of Texas Teachers’ assets stood at $146.2 billion at September 30, 2017, up from $133.2 billion a year earlier. Investment earnings added $16.1 billion to the fund’s value over the period, taking total investment earnings for the fund over the last five years to $54.2 billion, with net withdrawals for the year of just over $3 billion.
Voss said TRS has outperformed its investment benchmark in 14 of the last 20 quarters.
