Diversification Framework
Long-term asset allocation and risk guides
Asset Allocation and Risk Parameters
The TRS Board of Trustees sets the Trust's long-term asset allocation and risk parameters and approves the investment policy that guides Investment Management Division staff in their work to achieve the Trust's return objectives.
TRS organizes the Trust's assets into three broad categories based on how each tends to respond to economic conditions, characterized by factors such as GDP surprises, inflation, earnings, and valuations. The largest allocation is 57% to Global Equity — Public and Private Equity — which tends to perform well during normal economic conditions. It is complemented by a 21% allocation to Stable Value, which tends to protect the portfolio during deflationary recessions, and a 21% allocation to Real Return, which tends to perform well when inflation is high. Together, these categories are designed to capture the upside of strong economic conditions while providing ballast when conditions deteriorate in either direction.
The Trust is managed through several risk parameters. Allocation Ranges ensure that the Trust maintains a healthy balance of diversifying assets. Leverage and Liquidity are set to levels to support the Trust’s asset allocation. Finally, risk metrics such as Value-at-Risk and Tracking Error are continuously monitored to verify that investments both at the strategy level and in aggregate perform in-line with expectations on absolute and relative perspectives.
Diversification Framework
The TRS Diversification Framework is how the pension trust fund allocates its assets to deliver a long-term, risk-adjusted return through different economic and market environments. At the highest level, TRS thinks about assets in three categories based on how they tend to respond to economic conditions, and each category is made up of asset classes that tend to perform well under a particular set of conditions.
The graphic above shows a probability distribution divided into three vertical sections, with horizontal categories beneath them. The vertical sections represent the share of the Trust allocated to each asset category: Stable Value at 21%, Global Equity at 57%, and Real Return at 21%.
Global Equity (57%) is the Trust's largest allocation and is made up of Public and Private Equity. Global Equity assets tend to perform well during "normal" economic times: a not-too-hot, not-too-cold equilibrium characterized by positive growth and low, stable inflation with moderate surprises and reasonable valuations.
Stable Value (21%) includes Government Bonds (Nominal and Real), Stable Value Hedge Funds, and Absolute Return (including credit) assets. Stable Value assets tend to protect the portfolio during deflationary recessions: periods characterized by negative growth surprises, low inflation due to weak demand, negative earnings surprises, and a flight to quality.
Real Return (21%) includes Real Estate; Energy, Natural Resources & Infrastructure (ENRI); and Commodities. Real Return assets tend to perform well during periods of high inflation: characterized by low to moderate GDP growth, positive inflation surprises, low real earnings, and commodity-oriented demand that exceeds supply by an above-normal margin.
In addition to the above three categories, the Trust has a 5% allocation to Risk Parity, an asset class that invests in and balances risk across all three categories of assets. Risk Parity spans all three categories in the graphic because it is designed with diversification in mind, to be resilient to a variety of economic regimes. Finally, Net Asset Allocation Leverage supports all of these assets and amplifies returns at the total Trust level.
