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.

Sponsored Content

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.”

Leave a Comment

Sort content by

Is the financial services sector serving the public interest?

Fiduciary law, which creates the boundaries and rules for asset owners managing other people’s money, is evolving. The short-termism, misaligned incentives and complex and over-supply of services that characterises financial services, is under fire. Regulators around the world are increasingly looking at how to change the behaviour and supply chain dynamics in the industry, and

The impact of the mega manager

The impact of size is a delicate point for asset managers. For specialist asset classes, and boutique managers, being small and nimble can be a source of alpha. On the other hand, being large can reduce fees and increase innovation and product offering. But now there is evidence to show that the emergence of the

The contested role of asset consultants

Asset consultants are a key part of the investment chain, providing small funds with services that include decision making processes and strategic asset allocation, and for larger funds traditionally playing a key role in manager and strategy selection. But a study by Gordon Clark and Ashby Monk, which is part of a broader look by

Demystifying private equity

US public pension funds, on average, have around 9.4 per cent allocated to private equity but for many public funds monitoring the firms that manage these investments – including the transparency of underlying investments, fees, performance and benchmarking – as well justifying these investments to boards and stakeholders, takes up more than 10 per cent

Why investors employ smart beta strategies

The common view is smart beta is used to side step expensive active equity managers or hedge fund managers whose processes are on the surface opaque, but on close investigation turn out to be largely beta like in approach. As investors have gained experience and familiarity they have also learnt about how it offers greater

Managing culture with risk management techniques

The interaction between governance, culture and performance is increasingly a topic around asset owner board tables. But little has been written about the relationship between culture and the financial crisis, and how to change culture in financial services organisations. Andrew Lo, professor of finance at MIT, has come up with a proposal to change culture

Previous