Looking north, going direct

Adopting the Canadian investment model is not impossible for US plans, but it takes time to transition, something Texas TRS understands.

Faced with an increasingly competitive private market place, a growing trust size and a lower return environment going forward, the Teacher Retirement System of Texas might eventually go fully Canadian, managing most of its assets internally as opposed to relying on external managers.

But in the short term TRS wants to focus on laying the ground work to transition towards a more internally-managed model. That will include pursuing certain niche strategies internally, such as focusing on emerging managers and investing in royalties. It will also boost support for its investment team, particularly in technology and operations.

Jerry Albright, chief investment officer of TRS, is asking for 120 new hires in his growth plan over the next five years, but noted it could hire fewer, according to discussions at the TRS February board meeting.

Other key initiatives to become what TRS calls a “best-in-class global investment management fund”, include having more participation on boards, making more direct real estate investments, having more innovative partnerships with external managers and more global offices among others.

Going Canadian is not an easy transition for US public pension plans, which typically have a greater oversight from their board of trustees, may be more politically influenced and don’t always have the ability to retain talent.

This is why TRS, which has $150 billion in assets under management and plans to grow to $200 billion in five years, could be applauded for embarking on such a transition one step at a time.

Its private investments are currently split between 20 percent directs, which TRS refers to as principal investments, and 80 percent through external managers. External managers across asset classes at TRS cost about 98 basis points, or $1.4 billion in fees a year. If assets continue to grow according to plan and the model remains the same, costs will rise to $2 billion a year in five years.

Instead, in the next five years, it wants to increase directs in private markets to 30 percent, still lower than Canadian pension plans, which often have at least half of their private assets in direct investments and sometimes much more.

“That’s a stretched goal for us,” Albright said of a 50/50 split between internal and external in private markets. “Maybe five years from now we may move toward the Canadian model, but that’s not what we’re going to do now. We have to get a lot of things done before.”

More flexibility

A Canadian plan like the Ontario Teachers’ Pension Plan also spends about half what TRS does on external managers across asset classes. Under the new initiatives, Albright believes external fees could go down to 72 basis points a year in five years.

To be fair, TRS has already started laying some of the groundwork. In private markets, it has forged strategic partnerships with both Apollo Global Management and KKR and has focused more on co-investments to lower fees, including the opening of a London office in November 2015 to screen more deals.

Now Albright is asking the board for more flexible authority particularly in hiring and compensation.

“We’re not here to go to a different direction,” Albright said. “We’re here to build on what we’ve done and on our success.”

Details of the new initiatives will be fully fleshed out by June.