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Defensive Strategy Cushions Financial Effects of COVID-19 Downturn

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SPRINGFIELD, IL – Teachers’ Retirement System continues to protect member assets as much as possible and has slowly started to recapture funds lost to the economic devastation of the coronavirus pandemic.

The System’s strategic focus is on a prudent, long-term allocation of assets that is mindful of investment risk, protects assets during any economic downturn and is nimbly poised to take advantage of economic growth.

At the end of May, TRS held $50.6 billion in investment assets, a 4.1 percent increase in assets compared to the $48.6 billion reported at the end of March. Prior to the spread of the pandemic, TRS began the January-March quarter of 2020 with $54.2 billion in assets.

All public pension systems and institutional investors around the world lost money between January and March because of shelter-in-place orders caused by COVID-19 and the rapid spread and uncertainty of the virus. But compared to public pension systems similar to TRS, the System ranked among the nation’s leaders in its ability to preserve assets.

During the January-March quarter, the TRS investment return was -9.95 percent, net of fees. At the end of December, the TRS investment return for the year was +13 percent. These rates, however, stand favorably compared to other economic measurements of the same period:

  • The Northern Trust Corporation’s analysis of the 300 largest U.S. institutional investors indicated that the median return for public pension plans was -12.6 percent.
  • A similar analysis of public pension systems by Wilshire Associates found that the median quarterly return was -12.8 percent.
  • A customized analysis of 128 public pension systems completed by RVK, Inc., the TRS investment consultant, indicated the median return was -12.1 percent.

Using statistics from the RVK comparison, the TRS portfolio ranked in the top 25 percent of public pension plans during the quarter, meaning that 75 percent of the systems studied ranked below TRS. The System’s rank improves as these comparisons include long-term statistics. For instance, at the end of March the TRS 10-year and 20-year returns ranked in the top 10 of peer systems. TRS long-term investments out-performed 90 percent of similar systems in the United States.

In general, the negative investment returns for various stock market measurements indicate that the TRS portfolio held up comparatively well. Here are some January-March return rates of the three best-known stock market indices:

  • -22.97 percent - Standard & Poor’s 500
  • -26.23 percent - The Dow Jones Industrial Average
  • -17.83 percent - National Association of Securities Dealers Automated Quotations (NASDAQ)

TRS maintains a focus on steady, long-term investment returns. Short-term corrections in the investment markets get the headlines, but TRS recognizes that the majority of its members maintain relationships with the System that last for several decades.

Even with the effects of the coronavirus pandemic on the economy, TRS projects that its long-term investment returns will continue to exceed the System’s long-term assumed investment return of 7 percent. 

For instance, the 40-year return for TRS at the end of fiscal year 2019 was 9.2 percent and 9.1 percent at the end of calendar year 2019. During calendar 2019, the annualized return for the S&P 500 index was 8.4 percent. Current calculations indicate that at the end of FY2020 in June the TRS 40-year return rate will be 8.9 percent.

Although no one saw the COVID-19 virus coming, the resulting economic downturn did not catch TRS off guard. For years, economists have predicted that a downturn eventually would occur. For several years TRS has employed a relatively “defensive” investment strategy to guard against unforeseen drops in the investment markets.

For instance, when TRS decides each year how much money to commit to stocks, bonds, real estate and other investment markets, the System runs “stress tests” on the portfolio to help determine how best to protect assets during a downturn.

In all situations, the System’s top investment goals are to protect the assets and keep investment risk as low as possible. After that, the goal is to make prudent investments to increase the size of the fund. Some examples:

  • For the January-March quarter, TRS had approximately 32.5 percent of its investments in the stock market. That’s a comparatively low allocation relative to large public pension systems.
  • TRS has a diversified portfolio that doesn’t have all of the eggs in one basket. Traditionally, these different markets play off one another – if one drops, others rise.
  • TRS has 26 percent of its assets in bonds, about 15.7 percent in real estate, 13.4 percent in private equity opportunities and about 11.6 percent in investments designed specifically to help lessen the effects of an economic downturn.

In other news following the trustees’ regularly scheduled June meeting:

  • TRS has hired three firms to provide consulting services as needed when considering co-investment opportunities in the Private Equity portfolio -- Stout Risius Ross, Inc. of Detroit, Michigan; Aksia TorreyCove of New York, New York; and Meketa Investment group of Boston, Massachusetts. The firms form a pool of advisors that TRS can call upon as needed to help develop a public co-investment opportunity. This gives TRS needed flexibility in the marketplace. The contracts for the System’s pool of co-investment consultants will expire in no more than five years.
  • Within the System’s $6.5 billion Private Equity Portfolio:
    • The commitment of up to $100 million to Altaris Capital Partners of New York, New York. Altaris currently administers $75 million in TRS assets.
    • The commitment of up to $200 million to EQT Partners of Stockholm, Sweden. EQT currently administers $124.6 million in TRS assets.
    • The commitment of $150 million to New Mountain Capital Partners of New York, New York. New Mountain currently administers $216.6 million in TRS assets.
    • The commitment of up to $50 million to Pamlico Capital of Charlotte, North Carolina. Pamlico currently administers $15 million in TRS assets.
    • The commitment of up to $200 million to Silver Lake Partners of Menlo Park, California. Silver Lake currently administers $350.3 million in TRS assets.
    • The commitment of up to $75 million to Vista Equity Partners of Texas. Vista currently administers $96.6 million in TRS assets.
  • Within the $8 billion Real Assets Portfolio:
    • The commitment of up to $250 million to Brookfield Asset Management of New York, New York. This is a new investment relationship for TRS.
    • The commitment of up to $200 million to Strategic Partners Fund Solutions Advisors of New York, New York. Strategic Partners’ parent company, Blackstone Group of New York, New York, currently administers $620.6 million in TRS assets.
  • Within the $5.6 billion Diversifying Strategies Portfolio:
    • The commitment of $200 million to Capstone Investment Advisors of New York, New York. This is a new investment relationship for TRS.
    • The commitment of $150 million to Brevan Howard Asset Management of London, United Kingdom. Brevan Howard currently administers $232.7 million in TRS assets.
    • An additional commitment of $100 million to the existing mandate of Aspect Capital of London, United Kingdom. Aspect currently administers $251.6 million in TRS assets.
    • An additional commitment of $100 million to the existing mandate of Graham Capital Management of Rowayton, Connecticut. Graham currently administers $387.2 million in TRS assets.
    • The final redemption of $255 million from a risk parity strategy managed by Bridgewater Associates of Westport, Connecticut.
    • The full redemption of $161 million from a multi-strategy fund managed by Carlson Capital Management of Dallas, Texas.
    • The final redemption of $167 million from a multi-factor macro strategy managed by GAM of London, United Kingdom.
    • The full redemption of $200 million from a alternative risk premia strategy managed by Kepos Capital, of New York, New York.
    • The partial redemption of $100 million from a multi-strategy fund managed by AQR Capital Management of Greenwich, Connecticut. AQR continues to administer $1.4 billion in TRS assets.
    • The partial redemption of $100 million from The Man Group of London, United Kingdom. Man continues to administer $ 191 million in TRS assets.
    • The partial redemption of $75 million from a multi-strategy fund managed by Grosvenor Capital Management of Chicago. Grosvenor continues to administer $316 million in TRS assets.
  • Within the $12.6 billion Global Income Portfolio:
    • The commitment of $45 million to Locust Point Capital of Red Bank, New Jersey.
    • The commitment of $400 million to two strategies of the Pacific Investment Management Company of Newport Beach, California – $150 million to Corporate Opportunities Fund III and up to $250 million to the TRS Horseshoe Fund. PIMCO currently administers $1.48 billion in TRS assets.
    • An additional commitment of $100 million to the existing mandate of Beach Point Capital Management of Santa Monica, California. Beach Point currently administers $211.6 million in TRS assets.
    • The termination of the $600 million Dynamic strategy of the Pacific Investment Management Company of Newport Beach, California. PIMCO continues to administer $1.4 billion in TRS assets.
    • The termination of the $250 million commitment to Ramirez Asset Management of New York, New York.
    • The full redemption of the $96 million EMLS fund of PGIM, Inc. of Newark, New Jersey. PGIM continues to administer $2.17 billion in TRS assets.

About Teachers’ Retirement System

The Teachers’ Retirement System of the State of Illinois is the 37th largest pension system in the United States, and provides retirement, disability and survivor benefits to teachers, administrators and other public school personnel employed outside of Chicago. The System serves 434,313 members and had assets of $50.6 billion as of May 31, 2020.

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