TEXPERS Members' Asset Shift Contradicts Conventional Wisdom

According to the annual asset allocation and investment performance report from the Texas Association of Public Employee Retirement Systems, the pension systems for Texas’ firefighters, police, and municipal employees on average reduced their asset allocation to alternatives while boosting their fixed-income holdings. And the shift made over the course of a year was not insignificant.

The 40 pension funds that make up TEXPERS reduced their allocation to alternative strategies to an average of 25.5% as of Sept. 30, 2021, from 30.2% a year earlier, while increasing their fixed-income allocation to 23% from 16.2%. Among the alts investments, the allocation to private equity was reduced to 36% from 42% during that time.

With both interest rates and inflation on the rise, a shift from alts to fixed income is counterintuitive to common investing practices—and to what most pension funds are doing, according to a recent report from Aeon Investments. The firm surveyed 100 institutional investors in the U.S. and Europe with a combined $440 billion in assets under management and found they are mostly reducing fixed-income allocations while increasing their alts allocation, particularly via private equity. That’s the opposite of what TEXPERS has been doing.

“Over the past 18 months, many pension funds and other institutional investors have reduced their exposure to traditional fixed-income assets such as corporate and government bonds because they have delivered poor returns,” says the report.

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According to Aeon’s research, 23% of those surveyed had reduced their allocation to traditional fixed income by up to 10%, and 51% said they have cut their allocation by 10% to 15%. Another 14% have reduced their exposure by more, while just 12% said they have increased their fixed-income allocations.

Where are they putting those funds? The same place TEXPERS’ member systems are taking them out of. Aeon’s report says that 49% of institutional investors interviewed said that at least 25% of funds taken out of fixed income had been invested in structured credit-focused investments. Some 57% said they had allocated this amount to private equity, while 49% shifted money to commodities, 40% to real estate, and 35% to equities.

“A major beneficiary of the search for alternatives has been the structured credit market with growing interest in investment vehicles focusing on transportation, infrastructure, real estate, and private debt that can deliver robust income streams whilst having a strong focus on capital preservation and lower correlation to risk assets,” says the report.

Approximately 61% of respondents said they reduced fixed-income assets because of the strong performance of equities, while 53% said it was due to rising inflation, and 46% said it was because of falling valuations in fixed-income assets. Meanwhile some 42% blamed poor yields on many traditional fixed-income assets.

“With inflation rising and interest rates increasing, the outlook for some traditional fixed-income markets remains poor,” says the report. The survey found that 78% of pension funds and other institutional investors interviewed plan to reduce their exposure over the next 18 months. Approximately 19% said they expect to reduce their exposure to traditional fixed-income assets by up to 10%, while 46% said they would cut it by 10% to 15%, and 13% said they would lower their allocation by more. Only 20% said they expect to increase their exposure.