Texas Municipal Retirement System Response To Stock Market Gyrations
Like many allocators today, the Texas Municipal Retirement System (TMRS) is basing its response to the current stock market gyrations on staff’s experiences during the stock market downturns in 1987, 2001, and 2008-09 among other tests, but neither the team, nor TMRS’ current portfolio existed during any of those previous crises. “TMRS didn’t really even get into public equities until 2008 and 2009,” says T.J. Carlson, the CIO of TMRS. For years, the $30 billion system, which invests the retirement savings of employees from some 900 Texas municipalities – including all but the largest couple of Texas cities – had been invested entirely in investment grade fixed income.
But about a decade ago, Carlson says, “The actuaries, a new consultant and staff got together and talked to the Board,” and, they warned that “you currently pay out all your earnings as interest, and interest rates are declining.” There was no way to improve the low 70% funded status of the plan given that scenario. “They were also concerned about the long term value of plan benefits over time.” So, in 2008, the board got legislative approval to move from an income oriented fund to a total return fund. Carlson says, “They went from straight investment grade fixed income portfolio to an indexed 60/40 equity/fixed portfolio” and for years they have been happily participating in the greatest bull market in history. Funded status improved to well over 90% on a non-adjusted basis.
Carlson joined TMRS in 2013 and had “a lot of fun” building both the team and a modern institutional portfolio from scratch, but Carlson says, “during the last few months of 2018, we were getting nervous about the length of the bull run.” In December 2018, staff reviewed their growing concerns about future economic events with the TMRS Board who approved increasing the plans cash levels in preparation for an upcoming downturn (of unknown timing). “We used to run our portfolio very low on cash, half a percent or so, basically just frictional cash, at any given time,” Carlson said. “We raised our cash level to 2% to 2.5%, to take advantage of opportunities in a potential downturn, and to be able to make up for the capital distributions that usually, in our opinions, slow down or drop off during a downturn. We wanted to make sure we could pay benefits while covering capital calls and other bills.”
As 2020 began, Carlson says, the TMRS target asset allocation was down to 10% investment grade fixed income and 20% in “what we call non-core fixed income – high yield, EM and private credit, we had 10% each to private equity, absolute return, real estate, real assets, and then we had 30% in public equities.”
In December 2019, he recalled, “the board approved decreasing our public equity exposure from 35% to 30%, and we were in the process of implementing that drawdown in the portfolio, when the markets helped us out a little bit. On January 1st, TMRS was at roughly 36% or so in public equity. While TMRS did some rebalancing, he says drily, “the markets helped us out a bit in February and March, and we got as low as 28.5% in public equity and so were looking to add to equities. Then the rally happened and we were right back up to 32% to 33%.” Since then, he notes, “we actually took a bit more off the table.”
Carlson says, “We obviously did not see COVID coming, back in 2018, we just felt we were getting long in the bull market, we were trying to be a little cautious and well prepared.”
But, he says, “This is one of those lucky vs. smart kind of things, I think we were both.”
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