At least every five years, the TRS Board of Trustees and TRS investment professionals review the pension trust fund’s Strategic Asset Allocation, one of the agency’s most important undertakings on behalf of members.
The Strategic Asset Allocation, or SAA, establishes the fund’s long-term investment approach. It provides the targets and guardrails that investment professionals use to manage the portfolio and that trustees use to oversee investment decisions supporting the retirement security of Texas public education employees.
The importance of this work is reflected in TRS’ Investment Policy Statement:
The Investment Division will assist the Board in engaging in an asset-liability study for the pension plan at least once every five (5) years to review asset classes, return-risk assumptions, and correlation of returns with applicable benchmarks and across asset classes.
TRS’ Risk and Portfolio Management team, known as RPM, leads this work in collaboration with the agency’s investment teams, advisors, and consultants. The process considers the role of each asset class, expectations for long-term returns and risk, the relationships among investments, the fund’s liabilities, and the range of economic environments TRS could encounter.
Previous SAA reviews were completed in 2007, 2009, 2014 and 2019. In July 2024, following a comprehensive study, the Board approved the latest update to the pension fund’s allocation. The recommendations were intended to make the portfolio more resilient across a range of potential market environments while maintaining its overall balance and ability to achieve TRS’ long-term investment objectives. The revised allocation became effective in September 2024.
What changed in the 2024 SAA Study?
The 2024 study reflected how financial markets and the TRS portfolio had evolved since the previous review. The analysis included updated capital market assumptions, alternative allocations, and research into topics such as equity markets, interest rates, inflation, Risk Parity, and the roles of liquid and illiquid investments.
The largest changes affected Global Equity. TRS increased the Public Equity target from 40% to 45%, increasing exposure to U.S. and non-U.S. developed equities while reducing exposure to emerging markets and related foreign currencies. The regional equity benchmarks were consolidated into an All-Country structure using an MSCI All Country World Investible Market ex China and Hong Kong Index benchmark, providing a more unified framework for managing global public equity investments.
The Board also approved several changes intended to improve diversification and resilience:
• The Private Equity target was reduced from 14% to 12%.
• A new 6% allocation to inflation-linked government bonds, called Government Bonds – Real, was established to reduce portfolio duration and provide protection against inflation.
• The allocation to nominal government bonds, called Government Bonds – Nominal, was reduced from 16% to 10%.
• The allocation to Risk Parity was reduced from 8% to 5%.
The study concluded that the changes would have a limited effect on forward-looking portfolio risk and return, while improving resilience across a range of potential economic scenarios and maintaining an expected return above TRS’ long-term 7% investment return assumption.
What happens after an SAA is approved?
Approval of an SAA is not the end of the process. Following the Board’s decision, TRS develops, coordinates, and executes an implementation plan to transition investments, update benchmarks and align portfolio guidelines with the revised allocation.
Implementation of the 2024 SAA included reorganizing the public equity portfolio within the new All Country framework and completing related investment mapping and policy updates. This work required coordination across TRS investment, risk, operations, legal and compliance functions.
TRS also continues to monitor the SAA between comprehensive reviews. RPM maintains a recurring review process that evaluates how approved changes are performing, compares asset-class performance with long-term expectations, and revisits the economic and investment themes that informed the Board’s decisions.
This review considers the macroeconomic environment, changes in expected asset-class returns, developments among peer investors, total-fund performance, and ongoing research. This process provides a consistent way to assess whether the assumptions supporting the current allocation remain reasonable and whether changing conditions warrant additional research.
A Continuing Commitment
Strategic asset allocation is a deliberative and research-intensive responsibility. Markets, economic conditions, and the pension fund itself will continue to change, but TRS’ objective remains consistent: manage the fund prudently, balance long-term opportunity with risk and support the retirement security of members for generations to come.
The Board ultimately makes SAA decisions after reviewing the analysis, considering the alternatives, consulting their advisors, and evaluating how the portfolio supports TRS members over the long term.
Read the July 2024 announcement about the approved Strategic Asset Allocation changes.