The Teacher Retirement System of Texas Board of Trustees at a meeting in August, where officials discussed the fund's "unsound" accounting status, resulting from years of low investment returns.

A big bet on emerging-market stocks from places like China, Brazil and Russia saddled a $150 billion Texas pension fund with lagging investment returns in the third quarter, even as U.S. stocks surged to new records.

The Teacher Retirement System of Texas, which has the biggest allocation to the exotic-country stocks among the largest U.S. public pension funds, posted an overall return of 2.2% during the three months ended Sept. 30, according to a quarterly update posted on its web site. That was below the 2.63% average for big institutional investment plans, according to Wilshire Associates, a consulting firm based in Santa Monica, California.

The Texas fund's results underscore how once-hot stocks from countries like China, Brazil, India, Russia, Mexico and Turkey have underperformed this year as the Federal Reserve raised interest rates, making U.S. investment assets look comparatively more attractive. During the third quarter, the Standard & Poor's 500 Index of large U.S. stocks surged to a record of 2,941, while the main benchmark for emerging-market stocks slid for the second quarter in a row.

Following the recent pullback in U.S. markets due to investor concerns over trade tensions over China and a looming economic slowdown, the S&P 500 Index is down 1.2% for the year, versus a 15% decline for the benchmark emerging-market stock index.   

The Teacher Retirement System, which is Texas's biggest public pension plan, said in the quarterly update that its $26 billion U.S. stock portfolio gained 6.5% during the period, while its $14 billion of emerging-market stocks lost 0.6%.     

While emerging-market stocks can stage dramatic rallies under certain economic conditions, most experts consider the investments risky because the countries often have authoritarian governments, widespread corruption, fledgling markets, volatile currencies and more tumultuous economies when compared with markets in the U.S., Europe and Japan.   

An examination this year by TheStreet showed that the Texas fund made its push into emerging-market stocks based on lofty return projections from Wall Street firms -- including the now-defunct brokerage firm Lehman Brothers -- that stood to make fatter commissions from handling international stock trades than they could get from transacting on domestic exchanges.    

In 2007, for example, the banking giant JPMorgan Chase & Co. (JPM)  told the Teacher Retirement System that the exotic stocks would produce long-term returns averaging 11.5% a year, the highest among 25 asset classes, according to documents prepared at the time by the pension fund's staff and obtained through public-record requests under Texas state law.

Instead, since the end of that year, emerging-market stocks have produced investment returns averaging just 0.5% per year, compared with 5.5% for the S&P 500 -- a period that includes the U.S. subprime mortgage crisis of 2008.  

Partly as a result of the emerging-market bet, the Texas fund became actuarially unsound - an accounting designation that means teachers probably will have to increase their required monthly contributions to keep the retirement system solvent.

During a presentation on the fund's performance at a board of trustees committee meeting on Thursday in Austin, Texas, Steve Voss, a senior partner at the consulting firm Aon Hewitt, which advises the Teacher Retirement System on its investments, said the pension fund's staff had succeeded during the quarter in beating an internal performance benchmark of 2%.  

He didn't mention emerging markets, but according to the quarterly report, the pension plan was buffeted by "several economic themes" including strong U.S. economic growth, slowing activity in Europe and "declines in emerging-market equity, partly due to falling currencies."

Carolyn Perez, a Teacher Retirement System spokeswoman, declined to comment further.

As the Federal Reserve has raised interest rates in recent years, the increasing attractiveness of U.S. assets has prompted more big money managers to shift their money to domestic markets. That transition has increased demand for dollars, strengthening the U.S. exchange rate -- and further diminishing the value of investments denominated in foreign currencies.              

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