Teacher Retirement System of Texas Takes it on the Chin

by Louis Marascio on March 15, 2009

According to the Austin American Statesman, in the past six months the Teacher Retirement System of Texas has lost $34 billion representing a decline in value of about one third. From the article:

The Teacher Retirement System of Texas trust fund lost more than $34 billion in the past six months – a drop in market value of about one-third, according to an actuarial report released Friday. The system, one of the largest public pension funds in the world, now has only 68 cents for every dollar that it needs to cover promised benefits to its 1.2 million members over the long term; in August, that number was 90.5 cents. The financial markets fell 40 percent overall during that same time period.

Sure they like everyone else lost money, big surprise. What sort of perplexes me is that in search of a nominal 8% return (as indicated by the article), they were actually taking on enormous risk. Heck, I wouldn’t even be surprised if the TRS investment committee members were proud of themselves for beating the market—after all, they only lost 33% while the overall market dropped 40%.This isn’t unique to TRS, it’s more of a broad misunderstanding of the risks involved when making what are, essentially, “long the economy” investments.

I first heard that term while listening to a very successful investor, Salem Abraham, talk about his fund. Many really great investors have long been overlooked because they took a different approach than blind faith in the ever increasing equity markets. Usually the argument against investors like Abraham would have been based on the fact that they traded futures. Simply because the futures markets allow one to more easily shoot themselves doesn’t mean that talented folks like Abraham should be dismissed. After all, if you now look at their risk adjusted return compared to the S&P, it’s actually better.

If there is one good thing that I would love to see come out of the recent market turmoil, it would be that the equity markets are just as risky, over the long term, as other “alternative” investments like managed futures. Knowing this, investors should seek out diversification between asset classes. And this means more than just an equity/bond portfolio.

As a final note, you should go watch Elizabeth Cheval’s presentation on correlation and why you should be looking for negative correlation in your diversification. If you watch it, it’ll open your eyes. Or, you might simply dismiss it, and wait for the next market implosion.

  • mattymalone
  • http://fitnr.com Louis Marascio

    Thanks for the link Matt. It's good to see that the fund has regained some of its losses, but I do find it somewhat ironic that the fund managers are proud of their gains, given it represents extreme volatility. A near 50% retracement with a near 100% gain in the span of months is not the level of volatility these funds tout to their investors.

  • mattymalone

    Agree 100%, seems rather courageous for a long only/plain vanilla vehicle!

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