The Texas Municipal Retirement System (TMRS) has overhauled its fixed income-only strategy to include equities in the portfolio.
Eric Henry, executive director and chief investment officer at TMRS, commented: "The strategy has worked out pretty well for us, particularly as long term rates declined throughout the 1980s and 90s and we picked up a lot of value along the way."
Henry explained the decision to diversify out of fixed income was motivated by two main concerns: a low and declining fixed income yield - currently TMRS is getting just under 5.5%; and interest rate risk - at current rates TMRS could stand to lose 15% of its value over the duration, according to Henry.
TMRS has diversified into two equity index funds, the Russell 3000 and MSCI EAFE, with equal weightings.
"We are preceding slowly and cautiously, putting 1% of the fund a month into these two funds, 0.5% in each," said Henry.
"We have softly targeted 60% equities over a five-year period - we are taking our time getting there for a number of reasons."
One reason, Henry explained, was to allow the board time to understand both what it was investing in and also the virtues of having diversified non-correlated asset classes in the fund's portfolio.
Another reason, he added, was that the legislation surrounding the investment of TMRS was unclear.
Henry said: "We need to get some legislation enacted in the 2009 legislative session, we have the authority to invest in other types of securities other than fixed income, however, we need to clarify the interest credit mechanism we use to get gains into members' accounts. It is likely in 2009 we will begin to broaden and expedite our diversification plans and possibly talk about other asset classes."
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