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CalPERS renovates real estate portfolio

CalPERS will separate its real estate assets into legacy and new portfolios, as part of a new strategic plan for the asset class that more accurately reflects its evolved role as a result of the fund’s recent asset liability study.

The new strategic plan, the first since 2007, highlights that the legacy portfolio is comprised of assets that do not fit within the new role of real estate. With this in mind, a new portfolio, that does reflect the new role for the asset class, will be separated out.

Of the total $15 billion allocated to real estate, about $8 billion will be allocated to the new portfolio.

As part of the 2010 asset liability review – which defined the new role for real estate as having a low correlation to equities, providing stable cash yields, and as a partial inflation hedge – the asset class fits in to real assets alongside infrastructure and forestland.

As part of the plan CalPERS will invest in private real estate equity, focus most of the portfolio in the US, and organise the new portfolio into three sub-portfolios: base, domestic tactical and international tactical.

The plan also aims to reduce the overall risk profile by requiring a minimum of 75 per cent of the portfolio to be core, and use moderate leverage across the portfolio.

Pension Consulting Alliance, CalPERS’ real estate consultant, says to make the plan consistent with the role of real estate, and increase the ability to avoid losses, core should be no less than 75 per cent of the portfolio.

In a report to the investment committee, consultant Wilshire says this focus on core, with less use of value-added and opportunistic strategies, will reposition the portfolio to exhibit more stable income-producing characteristics and will reduce the portfolio’s historical reliance on leverage to drive returns.

In addition a new benchmark will be used which is a composite of open-end funds, the NCREIF Fund Index – Open End Diversified Core Equity.

The management of the portfolio will put more emphasis on income, which means investment in fewer development projects, and more stabilised cash-flowing assets.

There will be greater attention on monitoring and reporting cash yields, which the current benchmark does not do.

As part of the new plan there is a recommendation to re-organise the real estate team along functional lines, with three groups – new investments, portfolio management, and portfolio analytics research and operations – reporting to the senior investment officer, Ted Eliopoulos.

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