Local lessons: a Texas plan’s outlook on investments

2018 Investment Innovation Conference Coverage

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Flag of the US state of Texas Pavel Mastepanov © /123RF Stock PhotoIn a market environment where finding returns is tough, the Employees Retirement System of Texas turned to emerging markets and alternatives to provide the pension promise, said Sharmila Kassam, deputy chief investment officer at the Employees Retirement System of Texas.

The Employees Retirement System of Texas is a state pension plan that serves more than 350,000 state employees and their beneficiaries. Kassam said the plan’s return target is 7.5 per cent.

To get returns, the plan has gone through an evolution, Kassam said, noting that until 2007 it had a 60/40 portfolio and then decided to move to alternatives. “We did go through an evolution from public markets to private markets, looking for those opportunities,” she said.

Kassam said the portfolio is now about 40 per cent alternatives and 40 per cent public equities, and the rest is different forms of fixed income. And, the plan decided not to stay with a domestic home bias and has a global portfolio in all asset classes, including a seven per cent allocation to emerging markets, she added.

“We started [with] emerging markets in the public equities space, and a lot of people think that’s sort of the easiest way to do it, maybe the less risky way,” said Kassam. “I actually think that’s probably counterintuitive to the equation. Some of the areas like infrastructure actually present opportunities in emerging markets that maybe can be more secure. There are a lot of multilateral organizations where, if you invest alongside them, you’re able to get protections. Whereas in the public markets, different countries, depending on where they are, can just shut down.”

She also said infrastructure is appealing in emerging markets because there are fewer attractive opportunities in the domestic market. “We see the opportunity to build greenfield investments in emerging markets as a good risk-return profile,” she said.

Kassam also highlighted the important role private equity plays in the plan’s portfolio. She said that while she likes the concept of direct investing, the plan doesn’t have the governance structure to do so and instead looks to co-investments.

Kassam said the plan also uses secondaries, noting that the data show that secondaries can be a very attractive risk-adjusted return because they mitigate the J-curve, and you have a better sense of the portfolio.

“We look at secondaries both from a buying and a selling opportunity, and we’re trying to develop a direct program where we’ll be more opportunistic.”

On the private side, Kassam said she spends a lot of time looking at liquidity.

“On a regular basis, we’re looking to see how much is going out, and pacing accordingly,” she said. “But it’s definitely more of an art than a science some days.”

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