Britt Harris, CIO of the Teacher Retirement System of Texas, tells IPE about its public markets solutions partnership with JP Morgan Asset Management
In April 2008, the multi-asset solutions group of JP Morgan Asset Management (JPMAM) was selected to become one of four public markets strategic partners to the Teacher Retirement System of Texas (TRS) Trust. At the onset of the partnership, the Trust funded each partner with an initial allocation of $1bn (then worth about €640m) to be invested across public markets. Each mandate is judged against a custom benchmark determined by the Trust with a goal of generating a target level of alpha.
JPMAM’s Solutions team seeks to achieve these goals through security selection and tactical asset allocation. TRS’s stated goal is to achieve efficiencies in resource and knowledge transfer to help the Trust remain competitive in asset management, while meeting internal return goals.
As a member of this strategic partner network, JPMAM also participates in three summits per year, in which the solutions team is asked to present its thoughts on the current investment environment, individual asset classes and current tactical asset allocation views.
From a research perspective, the investment teams share market analysis and thought leadership on a timely basis. Most notably, JPMAM also shares its tactical asset allocation views and long-term capital market return assumptions, which the Trust utilises for its asset allocation and growth assessments. This knowledge transfer is furthered through two collaborative research projects a year, in which the topics are determined by the Trust.
IPE: What was TRS’s objective?
Britt Harris: The goal in 2007 was to develop long-term relationships with multiple high-quality and well-resourced investment firms along multiple points of impact on the Trust, rather than the customary shorter-term and much smaller mandates that are often the industry norm. My feeling has always been that if we back the best people in the industry, and give them proper long-term incentives and the flexibility to go where the returns are, they will find a way to generate significant alpha and to provide new ways of thinking for the trust along the way.
How were the parameters and deliverables determined?
I developed this framework nearly 20 years ago while I was CIO of Verizon. The parameters are intended to provide flexibility to the partners to achieve higher returns without increasing the aggregate risk profile of the trust. They also are highly aligned with the trust’s overall strategic asset allocation (with a focus on public assets). Additionally, because this relationship is characterised by openness and transparency, we gain additional insights from the expertise of our partners and their highly resourced platforms.
Who was involved from TRS and JP Morgan Asset Management?
Although I was perhaps the intellectual ‘father’ for the overall architecture, and our trustees were highly supportive and involved, it was our strategic asset allocation and research team that was responsible for the day-to-day development and management of the relationship. Today, we have a dedicated team to manage our strategic partner mandates, whose sole focus is the performance, care, monitoring, and improvement of these very important investment mandates and relationships. Their objective is to maximise the long-term effectiveness and efficiency of our largest and most important investment relationships.
“We have a dedicated team to manage our strategic partner mandates, whose sole focus is the performance, care, monitoring, and improvement of these very important investment mandates and relationships”
One of the hallmarks of the relationship is access and interaction at the most senior levels of management. To that point, Jaime Dimon and Mary Erdoes, both stand at the heart of our relationship with of JP Morgan Chase and their investment management, trading, and merchant banking divisions. These are full-firm, all-hands-on-deck, large and long-term relationships and thus they command and deserve the highest levels of management attention. Beyond top management, similarly close and aligned personal relationships exist between Mike Pia, Eric Lang, Bernie Bozzelli, and JB Daumerie and many others throughout both the TRS and JP Morgan organisations. Chris Wilcox and his full team are matched up with ours. A significant component to the success of the partnership is the effective collaboration we’ve formed at all levels of our organisations. From myself and Mary Erdoes, to our asset allocation heads and portfolio managers, to our respective operations teams, each person at TRS works closely with their JP Morgan counterpart.
How long did they work on the project?
The initial vetting process to identify the most compatible partner was a very comprehensive and deliberate process that lasted nearly a year. However, this is an on-going relationship that is designed to last for many years, so we don’t really consider it a ‘finished’ project, but rather a long-term relationship entering its eighth year.
How has the solution worked in practice?
Shortly after we launched the mandate, the world entered the global financial crisis. This certainly accelerated our collaboration and was a critical resource for us in managing the Trust asset allocation to equities, credit and bonds. Both organisations benefited as the trust’s return coming out of the crisis placed us top quartile among our peers and our strategic portfolio with JP Morgan adding 677bps in alpha in 2009. Today the relationship remains not only an important contributor to our overall expected return calculations, but also is a key input to our own internal tactical allocation processes and whose research impacts multiple investment groups. So, in practice, the strategic partner concept has been fully integrated throughout our organisation, and by any measure, would be considered a success.
Is TRS satisfied with the outcome?
We’re very pleased with the progress we’ve made so far – the performance of the JP Morgan partnership is in the top percentile over the last seven years when compared to public trusts greater than $1bn (€900m) – similar in size to our JP Morgan mandate – and our risk metrics are in line with expectations. Since its inception the JPM strategic portfolio has returned 6.5% and exceeded benchmark returns by 140bps annually. The research we’ve conducted with them has been practical and useful and allowed us to improve internal strategies and risk management systems. Our collective ability to effectively address market challenges when they arise and to continue to prepare for the future is continually improved and, I believe, both organisations are vastly better today because of our long-term collaboration. Most importantly, however, all of our teachers and educators have benefited from the successful investment results achieved by this powerful and more sustainable form of investment relationship.
Is this a template for other investors?
This template is particularly advantageous to any firm that invests in a diversified global fashion. It optimises your long-term results at the bottom line, can be easily customised to any particular risk preference, assures fee efficiency and alignment, contributes to – but does not control our larger asset allocation – and provides much more practical research improvements.