CalPERS is prepared to take on more risk.
The Sacramento-based pension fund, the nation's largest with $487 billion in assets under management, has built a real estate portfolio with defensive core characteristics that investors credit with protecting it from the real estate downturn. The fund's core portfolio was worth $45.2 billion as of March 31, representing nearly 88% of the fund's real estate holdings, according to a memo from an investment committee meeting this week.
But the pension fund, which serves 2 million California public employees, is looking to expand non-core investments in its real estate portfolio. As of March 31, CalPERS had $3.9 billion in value-add investments, or 8.5%, of its real estate portfolio, and $1.3 billion in opportunistic investments, or 3.7%. The upper end of the policy range for both strategies is 25%.
“Staff has effectively repositioned the real estate portfolio and is now in a position to consider moving up the risk curve and selectively increasing exposure to non-core managers,” Sarah Koh, CalPERS' managing investment director for real assets, said at the investment committee meeting.
“We have not yet seen widespread disruption in the real estate market, but we are well positioned to take advantage of opportunities if they arise,” she added.
The expansion into non-core strategies will be done through commingled funds and co-investment vehicles, which CalPERS sees as a cost-effective way to enter areas where capital raising costs are high.
As CalPERS seeks higher-risk, higher-return real estate investments, it is also looking to expand its real estate staff. The pension fund plans to hire four real estate specialists to add to its 42-person real estate and infrastructure investment team, according to the memo.
CalPERS plans to hire a real estate-focused investment manager, an associate investment manager, an investment officer and a staff services analyst, according to the memorandum.
The investor is planning these staffing increases as pension plans start to make bigger infrastructure investments and team members increasingly specialise in either real estate or infrastructure.
Of CalPERS' $66.4 billion in real assets, $50.3 billion is real estate and $15.7 billion is infrastructure. The value of CalPERS' real assets fell by $4 billion last year, mostly due to write-downs on its real estate portfolio.
While real assets posted a negative 8 percent return over the past year, the asset class outperformed the benchmark by 4 percentage points. Over a three-year period, real assets generated a return of 4.6 percent compared to the benchmark's 4 percent.
“Non-core businesses have underperformed over every period,” Koh said, “but a large part of this exposure is legacy assets that are candidates for disposal.”
Real estate performed slightly worse than overall real assets in terms of performance: it generated a negative 11.6% return last year, but still outperformed the benchmark by one percentage point.
While CalPERS is preparing to make further investments in non-core real estate, one of its most recent real estate fund commitments was $100 million in Nuveen Real Estate US Affordable Housing Fund, a core-plus open-end fund from Nuveen Real Estate. The investment marked the pension fund's first allocation to the New York-based asset manager.
For more information on CalPERS’ funding efforts, read the full story here.