By Muskan Arora
Following the
need for liquidity in the current ecosystem, Teacher Retirement System of Texas
(TRS) may increase exposure to their public equity sleeve by decreasing private
equity allocation.
Mike
Simmons, director of trust strategy at $193 billion TRS presented a reduction
in private equity by 2% (from 14% to 12%) in favour of increasing the “all
country global equity” allocation by 3%, in the recent board meeting.
The system
may add an additional 4th public equity bucket which is called all
country equity, which would make the TRS public equity portfolio look more like
“the investible public opportunity set”.
The
proposed benchmarks would likely be MSCI ACWI IMI.
A final
recommendation will be presented to the board in July for consideration in
September.
While the
change serves to lower both the expected return and expected risk to the
portfolio, Simmons stated that the shift would increase both “the historic
drawdown and improve trust liquidity”.
“A majority
of the increase to the historical drawdown is due to the fact that private
equity returns are smooth and lagged relative to public equity,” said Simmons.
Further, Simmons
also said that it would take them a long time to get to 12% as private equity
takes a long time to divest.
“You (board
member) have typically seen our peers who are increasing their private equity
allocations, which they are doing from a lower base. However, we have actually seen recent
reductions in private equity allocations which tend to be the ones who are
coming from a higher base,” he added.
“We are
kind of seeing both sides meet in the middle and we have largely been in the
middle with this reduction as well, as our average is 13%,” he presented to the
board.
The system
allocates $32.5 billion to their private equity sleeve, as compared to $69.7
billion to their public equity sleeve, as of December 2023.
Mike
McCormick from Aon spoke about how reducing the private equity sleeve would
reduce the size of the vintage years.
“This would
be a way to reflect benchmarks and hold the team accountable to more recent
decisions they are making and also the small funds that they don’t have the
ability to allocate to,” said McCormick.
With the potential
change, the consultant suggested considering modifications to the current SSPEI
benchmark through weight by vintage year and excluding funds smaller than 1
billion.
The system
might undertake another deep dive, behind the scenes on an ongoing basis, in
private equity benchmark to better understand what drives the outcome of the
portfolio.
If all
these changes were enacted, the result would be a modest reduction to expected
return and an increase to expected risk.
Additionally,
the system may also remove direct allocations from China and Hong Kong within
their public equity sleeve to move closer to their benchmarks.
This change
may come in due to economic weakness, political and geopolitical distress.
