CalPERS Reworks RE Portfolio, Targets US Core

(February 9, 2011) — The California Public Employees’ Retirement System (CalPERS) is expected to revamp its $15.4 billion real estate portfolio, targeting mainly domestic, core or stable-income producing real estate, run by managers in separate accounts.

The fund will wait to publish news about its specific allocation to real estate until the CalPERS Board acts on the recommendation at its Investment Committee meeting on February 14, fund spokesman Clark McKinley told aiCIO. A summary on the agenda for the board meeting provides a glimpse into the new role of real estate in the portfolio: “low correlation to equities, stable cash yields, and partial inflation hedge.” The prior role of real estate, according to the fund, “included return enhancement as well as diversification.”

Late last month, the $226 billion fund reported that it is looking to allocate around $2 billion to real estate deals in 2011 with a new strategy of more reasonable returns after its real-estate portfolio lost nearly half of its value, or more than $10 billion, from July 2008 to June 2009. The move reflects a trend among US funds to pursue real estate more conservatively, following dismal property returns in recent years.

The new strategy by CalPERS involves fewer investment managers, with less help from well-known managers such as BlackRock, Hines Interests and Jones Lang LaSalle Inc. The fund’s Chief Investment Officer Joe Dear told the Wall Street Journal that since the financial crisis, CalPERS has been reexamining its $15 billion real estate program. He noted that while many funds have decided to stray away from the sector, CalPERS has remained confident in real estate, pursuing the sector for its steady source of income as opposed to superior returns.

CalPERS reported a decline of only 5% in its real estate portfolio for the 12 months ended September 30, 2010, its smallest real-estate loss since the financial crisis and perhaps a signal that the sector is slowly rebounding.

The heightened interest in real estate represents renewed faith in the asset class around the world. The California State Teachers’ Retirement System (CalSTRS) has also made recent strides into real estate, as the fund has agreed to a $1.15 billion equity joint property venture with the Panattoni Development Company. The CalSTRS venture, under the name PanCal, will invest in commercial and industrial properties in the United States and Canada. Denmark’s largest pension fund, ATP, has allocated a further $907 million to invest in real estate funds, joint ventures and club deals through its subsidiary ATP Real Estate. And the Canada Pension Plan Investment Board is leading a consortium that has offered to buy 100% of the assets of ING Industrial Fund, a move for CPPIB to gain access to high-quality industrial properties.