At its June board meeting last week, staff at the Teachers’ Retirement System (TRS) of Texas presented a new strategic asset allocation plan that would increase the pension’s real assets target allocation from 13 percent to 16 percent. Given its current $126.12 billion size, the increase means TRS could allocate as much as $3 billion to real estate over the long term if the plan is approved at its September board meeting.
As of March 31, the TRS real assets portfolio totaled approximately $14.98 billion. The pension’s target sub-allocations for real assets include 82 percent for real estate investments, including 30 percent to core, 30 percent to opportunistic, 10 percent to value-added and 12 percent to special situations. The remaining 18 percent of the portfolio is designated for “other real assets,” such as infrastructure.
The real assets increase is part of a strategic asset allocation study that began in December. The study will end in September, when staff will make its final recommendations and present an implementation plan. Currently, TRS has given no indication of a timeline for the changes to the portfolio, only saying it is a “long-term” strategy that will be phased in over time. In addition to the 3 percent increase to real assets, investment staff also is recommending a 2 percent increase to private equity.
TRS staff proposed the boost to illiquid asset classes in order to achieve an additional 10 basis points in expected return and increase its Sharpe Ratio, according to pension documents. Staff noted that the real estate supply and demand fundamentals are “excellent, as a continued shortage of new supply has helped keep the market strong.” Furthermore, pension documents stated that the increase will have no significant impact on stress liquidity ratios, will provide the potential for additional alpha in manager selection and will allow TRS the ability to redeploy assets opportunistically.