The Texas Employees’ Retirement System has formalised a plan to invest in opportunistic credit, a new allocation that will initially total $270m in 2019 and ultimately will grow to total approximately $810m.

The initial 3% target allocation to the asset class was approved in 2017.

The $27bn Austin-based retirement system’s absolute return consultant, Albourne, will be the primary consultant for the opportunistic credit portfolio.

Albourne has been tracking private credit strategies since 2001, with more than 400 manager due diligence reports on file in the space, CEO John Claisse told trustees in a presentation at their 6 March board meeting.

The consultant is celebrating its 25th anniversary on the same day.

The approved opportunistic credit tactical plan calls for up to two investments this year initially focused on developed markets that will be sourced from the hedge fund, real estate and external global credit portfolio.

A total of 1% within each of those portfolios will be allocated to opportunistic credit.

Trustees were told that the portfolio will represent a wide range of strategies across three main themes – income-producing, asset-backed and distressed.

The $1.1bn hedge fund portfolio is already underweighted in the pension’s asset mix – comprising 4%  with the leeway to total up to 10% of assets in the long-term asset allocation plan.

Albourne’s Claisse described a healthy opportunity set within private credit, despite Texas ERS entering during the late-stage credit cycle.

The benchmark chosen was the S&P LSTA Leveraged Loan Index plus 150 bps, roughly 6.5% annualised.

In terms of overall performance, the Texas pension was down 1.7% at the end of 2018.  The system carries an assumed annualised actuarial rate of return of 7.5%.

While private equity contributed 2.1% to overall returns, global equities were a drag on the programme with a loss of 13% in the fourth quarter alone.

Hedge funds were down 1% in the fourth quarter, but overall were up 3% for the year ending 31 December 2018, according to reports filed at the trustee meeting.

Texas ERS outlines opportunistic credit action plan on HFM InvestHedge.