CalPERS’ real estate target to oscillate to 10 per cent

CalPERS will change its interim asset allocation targets to accommodate the smooth transition of the real estate portfolio to its long term 10 per cent allocation.

The real estate portfolio has been as much as 3 per cent below its target weight, due to significant write-downs in real estate, and as at June 30 the allocation was 7.8 per cent of the total fund.

Staff are proposing the real estate asset allocation be reduced to 8 per cent to the end of this year, and then moved up to 9 per cent at the end of 2012.

In a presentation to the investment committee next week, the CalPERS investment staff will recommend a number of interim changes that will allow the real estate portfolio to build up over the next year, but have little effect on the overall risk/return profile of the total fund.

In the recent real estate strategic plan, core income-generating commercial properties were highlighted as the focus of the portfolio. Due to high demand, the price of these properties has been pushed higher, so CalPERS says the changes to the asset allocation will allow it to be a more patient real estate investor, “better able to defer substantial new commitments until pricing is more favourable”.

To accommodate the changes in the real estate allocation, the new interim quarterly allocation targets mean there will be a 1 per cent increase in global equity from the third to fourth quarters this year; as well as a 1 per cent increase in income; and a reduction in the infrastructure/forestland target.

Paul Mouchakkaa, managing director of PCA, CalPERS’ real estate consultant, said the move more accurately reflects reality and allows for a more gradual build-up of the real estate portfolio, thereby reducing any potential vintage-year risk.

Managing director of Wilshire Associates, Andrew Junkin, said the actual allocation of 8 per cent meant the real estate portfolio was about $5 billion from its long-term target.

“Given the market demand for real estate, deploying an additional $5 billion in net exposure at fair prices would take a considerable amount of time. Thus the underweight will persist for some meaningful amount of time, especially since staff has been focusing more over the past few years on disposing of problem assets and improving the quality of the existing portfolio than on making new investments.”