Texas Teachers' CIO Auby is underweight stocks, says investors should hold cash despite inflation

Published Mon, May 2 20223:02 PM EDTUpdated Mon, May 2 20223:57 PM EDT

The investment chief at the Teacher Retirement System of Texas is 'marginally' underweight equities, and recommends investors hold onto cash even if it erodes with inflation. "We are underweight U.S. equities actually at this point in time — marginally so," Texas Teachers CIO Jase Auby told Brian Sullivan during a special "Pro Talks" interview for CNBC PRO from the Milken Institute Global Conference. The chief investment officer said the pension fund is underweight 1%, or roughly $2 billion, of its target allocation to equities to lighten up some risk in the portfolio. As of December, the Teacher Retirement System of Texas had roughly $204.7 billion in assets, according to a fund spokesperson. "The idea there was 'Hey, things are still fundamentally strong in the U.S. economy. Risks are ticking up though. Probably would make sense to put a little on the side,'" Auby said. Among the challenges ahead is the aggressive stance against inflation from the Federal Reserve, which is expected to raise interest rates at its meeting this week. Auby believes the Fed's mandates are "flashing late cycle" even as other indicators suggest the underlying economy is doing well. Instead, Auby told Sullivan he is holding on to cash instead of stocks: "If you trimmed by a percent in U.S. equities, what are you doing with that money?" Sullivan asked. "We're holding cash, for sure," said Auby. "But inflation eats cash," said Sullivan. "It does, but that opportunity cost is still better than if you're holding it in something that goes down," Auby said. "I don't know if I have ever heard anybody in your position in a long time say I'll take negative 5% or 6% because that may be all I'm gonna get, and that's the best worst case scenario," Sullivan said. "That sounds really bearish." The investment chief said he remains optimistic and does not think that a recession will come in 2022. Still, he noted that equities will have to rally significantly to make up for losses this year. The S & P 500 is down 14% year to date. "I think that people should have a little bit of cash," Auby reiterated. "People need to be prepared." Energy, 'digital gold,' and others The chief investment officer was more positive toward other investments. Auby said the Teacher Retirement System of Texas is invested in real assets such as energy, natural resources and infrastructure, such as pipelines and renewables. The category accounts for about 6%, or $12 billion, of the pension fund, according to the investment chief. In the most recent fiscal period ending August, the segment returned 18.1%, according to the annual report. Other assets the pension fund leader finds "highly interesting" include cryptocurrencies. The investor said the pension fund is invested in crypto through venture capital firms, instead of investing directly into cryptocurrencies such as bitcoin, after two years of research. Still, Auby believes the asset can approach the ability to function as "digital gold." Physical gold is another asset that the pension fund has invested in. The pension fund is also looking into European equities. Auby believes the market has already priced in bad news from the ongoing war in Ukraine. "We like Europe... because we think that the market has reacted to what's happened," the investor said. Lastly, the Teacher Retirement System is also a huge investor in single-family in both the public and private markets, as well as multi-family housing. The real estate portfolio returned 17% in the last fiscal year ending August, according to the pension fund.

A general view of the city of Austin along the Colorado River in Austin, Texas, U.S., October 25, 2021. Picture taken with a drone.

Mike Blake | Reuters

The investment chief at the Teacher Retirement System of Texas is 'marginally' underweight equities, and recommends investors hold onto cash even if it erodes with inflation.