published Mar 23, 2018, 4:00:00 AM, by Michael McDonald
(Bloomberg) —

The Teacher Retirement System of Texas is one of the largest public pensions in the country, is considering almost doubling the size of its investing team so it can cut expenses by managing more of its money in-house.

Jerry Albright, chief investment officer at Texas Teachers, has proposed adding 120 people over five years, which would increase the team to almost 270 people, according to a video of a board meeting posted to the fund’s website in late February. That would allow the $150 billion pension to buy more assets directly, cut external fund managers and slice fees by at least $600 million, Albright told the board.

“It will show up as reduced costs,” Albright said at the Feb. 15 board meeting. “We feel we can get there if you give us the resources.”

Cutting Fees

A number of public pensions say they can cut fees and produce equal-to-better returns by picking investments themselves. The California Public Employees’ Retirement System, the largest public pension in the U.S. with about $350 billion of assets, handles 70 percent of assets internally, mostly by trading stocks and bonds, and has considered developing expertise in private equity, real estate and infrastructure as well.

Albright joined Texas Teachers in 1994 and was promoted from deputy CIO last year following the departure of Britt Harris, who spearheaded changes to the investment program in the past decade. Harris became chief executive officer of the University of Texas Investment Management Co. — located about six blocks from Texas Teachers’ offices in Austin. He’s hiring and planning changes to the way the $31 billion in endowment assets are invested.

The success of direct investing comes down to governance and the political independence to pay enough to attract and retain staffers, said Keith Brainard, research director at the National Association of State Retirement Administrators. Also, as some pensions shift to internal management, others are cutting costs by putting more money into external passive funds, he said.

“Every pension plan is unique and the internal-external, passive-active approaches are in a continual state of flux,” Brainard said.

Staff Expansion

Headcount at Texas Teachers has been growing on pace with assets under management as the fund has shifted to alternative assets from conventional stocks and bonds, Albright said at the meeting. The investing team employs almost 150 people and, without additional authorization from the board, may add another 50 in the next five years, he said.

The new hires would likely be based in Austin but the proposal is still being refined, according to the fund.

While Texas Teachers has generated $11 billion of returns in excess of its benchmark over a decade, it has one of the highest cost structures among peers because it’s more dependent on external managers, Albright said. The average cost was 98 basis points, or just less than 1 percent, which would equal about $1.4 billion in fees a year, he said.

Albright said the pension could cut the cost to 72 basis points through the plan he has developed, which emphasizes hiring analysts and technology staff to support the investment team. He said he wants to increase direct investments in private markets to 30 percent from 20 percent of the portfolio, and boost public markets to half from 40 percent.

The average cost of managing investments at Texas Teachers is twice that of the top-performing Ontario Teachers’ Pension Plan, which employs more people and makes significantly more direct investments, the board was told. Texas Teachers could move its portfolio to more closely resemble the Canadian pension’s model, Albright said.

Some Skepticism

Texas Teachers’ proposal was met with some skepticism. Christopher Moss, a member of the board since 2010, said at the meeting he was concerned the cost savings wouldn’t necessarily translate directly into boosting the pension’s size.

“What happens if we’re wrong?” asked Moss, who runs a financial advisory firm in Texas.

Brian Guthrie, Texas Teachers’ executive director, told the board the proposal, which would also need approval from the state legislature, was a first step and that he expects details of the plan to be fleshed out by June. He said the accelerated hiring “could be a huge shock to administrative costs,” and it was important to show state legislators how the benefits are measured.

“I’m glad you guys are looking at this,” said Jarvis Hollingsworth, a lawyer who is chairman of the Texas Teachers board. Texas Teachers “has evolved,” he said.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net Mary Romano, Vincent Bielski

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