Sep 9, 2024 · 1h 2m · capital-allocators
Jase Auby - Risk, Size, and Talent at Texas Teachers (EP.404)
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In this episode of Capital Allocators, host Ted Seides interviews Jase Auby, Chief Investment Officer of the Teacher Retirement System of Texas, exploring how one of the largest public pensions in the United States navigates quantitative risk modeling, fee innovation, decentralized governance, and forward-looking macroeconomic asset allocation.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21.3% of the talking time here. How this is scored →
Ted as informed peer 5.2 Guest teaching 5.8 Guest disagreement 0.3 Ted pushing back 0.2
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 51:50 Dismissing top-down climate ESG framing
Jase pushes back against conventional top-down ESG frameworks, noting catastrophic risk modeling has existed for 500 years and asserting that TRS already knows how to underwrite physical asset risks.
Hardest push from Ted ▶ 36:32 Challenging the fusion of quantitative risk and bottom-up judgmentTed presses Jase on how a CIO with a strictly quantitative horizontal risk background evaluates and reconciles qualitative, bottom-up manager assessments from vertical teams.
Biggest teaching moment ▶ 13:20 Explaining the uniqueness of unlevered pension balance sheetsJase educates the audience on why risk management in a 26-year horizon unlevered public pension focuses on risk efficiency rather than existential insolvency risk.
Ted holds their own ▶ 49:07 Probing adoption pushback on hedge fund cost-of-capital hurdlesTed demonstrates keen industry awareness by questioning the actual traction and resistance institutional signatories encounter when imposing strict cash hurdles on legacy managers.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Jase Auby's Early Technological Background and Wall Street Entry | 4 | 5 | 0 | 0 | Ted prompts Jase on his background entering Wall Street with a computer engineering background. Jase describes transitioning into fixed income at Goldman Sachs when technologists were first joining trading floors. | |
| Structuring Cash Flow CDOs at Lehman Brothers and Returning to Texas | 4 | 5 | 0 | 0 | Ted asks Jase about structuring early CDO products at Lehman and his entrepreneurial ventures after moving to Austin. Jase details building the cash flow CDO desk and technical lessons learned from startup ventures. | |
| Rethinking Pension Fund Risk Management Post-GFC | 5 | 7 | 1 | 0 | Jase provides a deep conceptual breakdown of why pension fund risk management differs fundamentally from levered institutions. Ted listens closely as Jase outlines TRS's 26-year horizon and unlevered balance sheet. | |
| De-Smoothing Private Market Risk and Developing Public Proxies | 5 | 7 | 0 | 0 | Ted probes how Jase approached measuring risk in a large portfolio with heavy private allocations. Jase explains the statistical necessity of stripping out valuation smoothing and developing public proxies. | |
| Adopting Public Market Equivalent (PME) Performance Benchmarks | 5 | 6 | 0 | 0 | Ted asks about portfolio adjustments following the proxy modeling and how TRS approaches energy. Jase explains transitioning fully to Public Market Equivalent (PME) benchmarking and capitalizing on traditional energy divestment by peers. | |
| Bifurcating the Hedge Fund Portfolio: Stable Value vs. Directional | 6 | 6 | 0 | 0 | Ted inquires into TRS's stable value approach and modest portfolio leverage. Jase breaks down the rationale for separating hedge funds into zero-beta stable value versus directional equity overlays. | |
| Navigating the Competitive Advantages and Capacity Constraints of Scale | 5 | 5 | 0 | 0 | Ted and Jase discuss the trade-offs of managing $200 billion in assets. Jase details relationship advantages and access against the structural capacity constraints in asset classes like venture capital. | |
| Organizational Architecture and the Special Opportunities Group | 5 | 6 | 0 | 0 | Ted asks how TRS structures teams to evaluate cross-asset opportunities and win the war for talent. Jase explains their Special Opportunities Group and their 4-pillar talent value proposition. | |
| Transitioning to CIO and Decentralizing Decision-Making Authority | 5 | 6 | 0 | 0 | Ted inquires into Jase's shift from CRO to CIO. Jase describes deliberately decentralizing decision authority away from a monolithic CIO office and creating dedicated asset-class investment committees. | |
| Sponsor Message: Ridgeline Investment Management Technology | 6 | 5 | 0 | 2 | Following the mid-roll sponsor break, Ted pushes on how Jase balances a quantitative horizontal risk background against qualitative bottom-up manager decisions. Jase explains setting quantitative boundary parameters while delegating qualitative selection. | |
| Craftsmanship Alpha and Investment Committee Dynamics | 5 | 5 | 0 | 0 | Ted asks for concrete examples of improving decision architecture. Jase outlines craftsmanship alpha, optimal committee sizing of 5 to 6 people, and the operational principle of avoiding 'slow maybes.' | |
| Innovation and Identifying Emerging Niches in Real Estate | 5 | 6 | 1 | 0 | Jase challenges the conventional obsession with office real estate by pointing out that modern indices are dominated by industrial and niche sectors, underscoring that innovation is mandatory for sustaining alpha. | |
| TRS Emerging Manager Program and Graduation Framework | 6 | 6 | 0 | 0 | Ted and Jase discuss TRS's 20-year Emerging Manager program. Jase outlines the three core tenets (performance first, diversity, and graduation) and why they discontinued emerging VC allocations due to lack of demonstrated edge. | |
| Fee Innovation: The '1-or-30' Model and Cash Hurdle Campaigns | 6 | 5 | 0 | 1 | Ted asks about TRS's fee leverage. Jase details the adoption of the '1-or-30' fee structure and their recent institutional campaign demanding cash hurdle benchmarks in a 5% rate environment. | |
| Global Expansion Strategy and Establishing the London Office | 6 | 6 | 2 | 0 | Jase outlines why TRS established a London outpost for private markets and defends their strict fiduciary approach against top-down ESG activism, introducing their Global Board Aligned proxy voting model. | |
| Macro Outlook: AI Power Infrastructure, Diversified Beta, and India | 5 | 6 | 1 | 0 | Jase shares macro views on data center power infrastructure bottlenecks and makes a contrarian call that diversified beta via risk parity and Indian equities will outshine US large-cap equities in the coming decade. |
Statements from this episode (39)
Goldman Sachs employs 12,000 software developers, per Auby
“I heard a statistic saying they have 12,000 developers now at Goldman, which is just an astronomical number if you think about that”
Auby: Where active hiring occurs signals where the next innovative market is
“One of the great things about being young is, whoever's hiring, that's where the innovation is. That's the next market.”
Python has largely replaced Excel in institutional finance, says Auby
“Python has certainly taken over everything that we do on the finance side, even at Texas teachers. I mean, kids show up and it's not necessarily just Excel anymore. It's Python programming.”
Public pensions and endowments are among the only unlevered capital pools
“It's a pension fund is not levered. So it's one of the only pools of capital on the planet that doesn't actually have balance sheet leverage. So you're talking about a public pension funds, endowments, and sovereign wealth funds. These are the unlevered pools …”
Auby: Pension risk management is about efficient deployment, not existential survival
“What it shifts from is not so much catastrophic risk, not so much existential risk, Run on the bank type risks. It turns into more, how do you most efficiently use risk, most efficiently deploy it?”
Texas Teachers maintains a unique zero percent allocation to credit
“And then we also have, which is pretty interesting, we have zero allocation to credit, which is a little bit unique. Most public pensions have some allocation of credit. We don't have any.”
Auby: Texas Teachers applies 4% leverage for 104% asset exposure
“Eight percent is risk parity. And finally, we are levered about four percent. So we are up to a 104% of assets versus a hundred percent of NAV value.”
Texas Teachers peaked at 42% private markets and is now at 38%
“Over time, Texas teachers, at our height, we were 42% private versus a 35% neutral, or down to about 38% private versus, still versus a 35% neutral now, and it really became tail wagging the dog, because there's more risk in private markets than there is in pu…”
Private market valuation lags make portfolios look artificially diversified
“There's one type of smoothing in that evaluations don't occur as regularly as you do in the public market. The other thing that occurs is everything's lagged as well. So both of those things are going to show you to be more diversified than you actually are.”
Texas Teachers maintains a unique 6% dedicated energy portfolio allocation
“For us, it's a real advantage as other types of investors globally are prohibiting or withdrawing from investing in energy. I mean, we're very much open for business and we see it as a crucial opportunity for us. So we've leaned into that. We have that six per…”
Auby: Texas leads the nation in oil, gas, solar, wind, and batteries
“Texas is number one in pretty much every form of energy you can name. So number one in oil, number one in gas, number one in solar, number one in wind, number one in batteries. I just read the other day.”
Auby: Texas Teachers only backs solar and wind on strict return basis
“We don't necessarily see it as our role to invest in that solar and wind. We will, but we'll only do it on a straight return, you know, maximized return, strict fiduciary basis. We'll do it if it's a good investment, but We find that others want to invest in t…”
Auby: TRS holds 49% of its portfolio in alternative assets
“So we have 11% of our portfolio in hedge funds, and that's in addition, by the way, to that 38% of private, so total alternatives is 49%, which again is quite high for a public pension, but quite low versus the endowment community.”
Auby: Bifurcating zero-beta and directional strategies is fairest hedge fund benchmark
“And so we measure that stable value hedge fund portfolio versus a cash-like benchmark plus a spread. Then we measure that directional portfolio versus a full beta long only equity benchmark. And so we overlay that portfolio with derivatives in order to achieve…”
Auby: Texas has the longest US teacher pension liability at 26 years
“Texas has the longest liability of any teacher fund in the United States, and that's because Texas is a high-growth state, so we're hiring a lot of teachers, so we have a lot of younger teachers, and so our liability is amongst the longest, 26 years.”
Auby: Public pensions are among the world's most liquid capital pools
“Public pension funds are some of the most liquid pools of capital in the world, and there's a lot of implications for that. You have liquidity at the times you need it. You can go in liquid when illiquidity is being rewarded.”
Venture capital capacity limits restrict large public pension allocations
“So venture capital, for example, can be difficult for us to ask because the gating item for venture capital is oftentimes not capital. We have lots and lots of capital, but if someone has a five hundred million dollar fund and we say we want two hundred millio…”
Auby: TRS manages $200 billion with 240 staff members
“We have 240 people and two hundred billion dollars.”
Auby: Institutional peers pass on great investments due to rigid asset-class silos
“Sometimes the most attractive, interesting investments are the ones that most of your peers said no to because they all said, well, is this a private equity deal or is this a credit deal or is this a real estate deal or is this an infrastructure deal? We don't…”
Texas Teachers lost 25% of its staff during the Great Resignation
“In 21 and 22 combined, those two years, we lost 25% of our staff, which was one in four folks walked down the door, the great resignation.”
Auby: Remote work enables Austin talent to leave TRS for New York firms
“Working from home has hurt us a little bit, actually, because people can now, for example, work from home for an employer in New York City, and then move to Austin. And so they don't need to necessarily change employers. And folks can leave us And join a firm …”
Auby: TRS decentralized investment committees into separate asset class verticals
“One thing we did was to make sure that we had one internal investment committee that approved all investments for the entire fund. And now we've put investment committees into each vertical. So now there's a private equity investment committee, a real estate i…”
Texas Teachers invests in data centers across PE, real estate, infrastructure, and debt
“One example might just be data centers, which is something that we're investing in, in private equity. We're investing in it in real estate. We're investing in it in infrastructure and we're investing in it in debt.”
Auby: Investment committees function best with five to six members
“So the size of a committee is very important. You want it large enough that you get a very diverse set of viewpoints, but you don't want it too large because then there can be a real free rider problem actually when you have a committee that's too large and yo…”
Auby: Industrial makes up 34% of the ODCE real estate index
“In fact, and the most commonly used core index, the Odyssey industrial, which Amazon warehouses, that sort of thing is 34% of the index is the largest part of the index.”
Auby: Office buildings make up only 21% of commercial real estate
“Everyone still thinks of office buildings, but office buildings is last I saw just 21% of the commercial real estate market.”
Texas Teachers excludes venture capital from its emerging manager program
“We don't allocate to venture capital in our emerging manager program. And there are a lot of emerging managers in venture capital. But we've not had success there.”
TRS requires emerging managers to graduate or exit after three funds
“As a general rule, we'll do three funds with an emerging manager, and then we have to make a decision. Do they graduate, or are we done with this relationship? Because at that point, we no longer consider them to be emerging.”
Texas Teachers has graduated only 12 of 190 emerging managers
“Of those 180 managers that we funded, we've had 12 graduate to full-fledged allocations in the portfolio.”
Texas Teachers achieved near 100% '1-or-30' fee adoption in directional hedge funds
“In our directional hedge fund portfolio, we have near a hundred percent achievement of that one or 30 over an appropriate risk benchmark fee structure.”
Texas Teachers secured 60 signatories pushing for hedge fund cash hurdles
“So we've launched a second initiative this time, and we have 60 signatories to the letter we put together, and it's the idea of in a zero beta portfolio using cash, paying fees worth a cash hurdle.”
Auby: TRS Is the Only US Public Pension with a Foreign Office
“So we are the only public US fund that has a foreign office, and we have our office in London.”
Texas Teachers rejects climate lens in favor of strict fiduciary risk-return
“We are very much in that strict fiduciary mindset where we're not thinking about the climate lens in particular on the portfolio as a lens separate and distinct from just thinking about risk and return on a portfolio.”
Texas Teachers instituted proxy policy to systematically vote against activist shareholders
“Several years ago we went to our proxy provider and we said, We're going to need you to come up with a new benchmark policy for us that takes out these more activist types issues, and we suggested they call it the strict fiduciary policy, and they actually end…”
Data center investing is fundamentally about access to power, not land
“Usually when you're investing in farmland, you're not actually buying the land. What you're really buying is access to water. It's more about water than it is soil. And so data centers is the same thing. It's about access to power.”
AI will accelerate market efficiency, making alpha harder to generate
“Alpha is going to get harder and harder and harder. It already has gotten harder. AI is going to actually speed up that as well. And so as investors thinking about beta is going to become more and more important over time and having the best beta you possibly …”
India, not the US, will be the dominant market in the 2020s
“And I don't think the U S is going to be the dominant market in this decade. At this point, it's probably going to be India.”
Auby: Once lost, personal reputation can never be fully recovered
“You only have a triple A rating once. Once you lose your triple A rating in life, you'll never get it back. Maybe you can come close, but you'll never get that triple A rating back.”
Playing naive effectively deters unethical propositions at work, Auby advises
“Naivete is a great tool in an ethically challenged situation. So if someone's coming to you with something that's maybe ethically challenging, and if you ask why a lot, and you're like, well, why does this make sense? And why is this helpful? People just go aw…”