Returns from one allocation have outshone all others at the $230 billion Teacher Retirement System of Texas over the last year. TRS’s tiny $403 million allocation to gold sits in a commodities sleeve which posted a one-year return of 59.8 per cent, trouncing the Goldman Sachs Commodities benchmark which returned 10.1 per cent.
“One word there: gold,” said Jase Auby, at TRS for 16 years and chief investment officer since 2019, speaking during the pension fund’s December investment committee meeting that celebrated stellar one-year returns across the board with 10 of TRS’s 14 asset categories returning above 10 per cent.
The gold allocation – which was doubled this year – comprises a special gold fund launched back in 2009 to provide a strategy independent of commodities. The fund is invested in gold and silver (via ETFs) and precious metals equities where TRS owns core large cap quality stocks like Agnico Eagle Gold and Wheaton Precious Metals, but also promising exploration and early development stocks.
This year other investors have also tapped into the benefits of an asset that sees its value rise in a world worried by inflation, geopolitical instability and government debt levels, as well as de-dollarisation.
For example, Australia’s A$223 billion ($143.2 billion) Future Fund added exposure to gold. European pension funds, particularly Swiss institutional investors, are long-time gold investors like Migros-Pensionskasse (MPK) the CHF29.4 billion ($31 billion) pension fund for Switzerland’s largest retailer, Migros.
Strong returns across the board
TRS posted a one-year return of 10.7 per cent which equates to a 150 basis point excess return above the benchmark. The fund’s three-year return came in at 11.5 per cent with 190 basis points of excess return. The best three-year return in TRS’ history, it resulted in an additional $66 billion coming into the trust, $55 billion from the market and $11 billion from alpha.
TRS’s highest one-year performers included non-US developed market equities (22.3 per cent) which outperformed US equities for the first time since the GFC. Absolute return also did well, returning 18.2 per cent. Real estate and government bonds were poor performers, and US treasuries have not only dragged on the portfolio but also increased risk because they haven’t provided the diversification they were meant to.
Borrowing from the future
The majority of the outperformance came from security selection: although asset allocation is the primary driver of returns, security selection adds additional value. Still, strong returns in recent years indicate lower returns in the future, and trustees were reminded that the returns should be viewed through a rear-view mirror.
“Sometimes it feels like we are borrowing from the future,” said Mika Malone, managing principal and Meketa Investment Group, presenting to TRS with managing principal Colin Bebee.
Moreover, even though TRS’s one-year returns from private equity still hit double figures (10 per cent) the portfolio’s underperformance relative to public equity will prompt analysis going forward. TRS has a 12 per cent long-term target to private equity that is currently overweight at around 15 per cent.
Risk Parity in action
The board also had an update on the $11.3 billion allocation to risk parity, recently pared back to 5 per cent from 8 per cent of the portfolio. Two-thirds of the diversified, liquid portfolio designed to function well in any market environment due to the balance between different asset classes is managed internally.
Although long-term returns have been up and down, recently it has done well with a positive one-year (10 per cent) and three-year (13 per cent) return.
Auby explained that the allocation is particularly useful in times of need. For example, the TRS team leaned into the allocation for liquidity during the pandemic. It is also the biggest holder of commodities in the trust.
“Risk parity is an alternative way to allocate assets,” he said, explaining that most pension funds allocate in a traditional way without leverage, in equity-heavy strategies that are “tried and true.” But by allocating a small amount to risk parity TRS is able to keep the door open to the strategy, and track its performance against the rest of the portfolio.
In contrast some pension funds like Denmark’s ATP use a risk parity strategy across their entire portfolio.
