Pension fund executives have quite a laundry list of what they want from their real estate managers, a survey of 73 funds by the National Association of Real Estate Investment Managers, Los Angeles, found.
For starters, pension funds want the inherent conflict of interests in the investment manager's role resolved.
"The days of the large asset management fees based solely on some arbitrary value, where investment managers have no incentive to sell assets, are over," the survey stated.
Pension funds also want increased understanding by the investment manager of the responsibilities of being a plan fiduciary.
And, they want investment managers to provide a vision for the industry. "Simply, plan sponsors are seeking an answer to the question 'Where will real estate be three or five years from now?'*"
Other results of the survey:
Every client relationship should be customized to meet the individual fund's needs. This will require investment managers to acquire more in-depth knowledge of the employee benefits "culture" and overall portfolio issues.
Discretionary commingled funds are of little interest to the majority of fund executives unless they capture a unique market niche. Separate account vehicles continue to meet most investor needs.
All future real estate investment opportunities must include realistic and demonstrable exit strategies. That's not surprising, considering the bad experiences many pension funds have had with trying to withdraw from open-end, commingled funds.
The successful investment management firm of the future will offer a specific, well-defined investment strategy; provide access to key executives on a continuing basis; have sufficient capitalization to participate in co-investing and/or have manageable expenses so performance-based fees don't impact the services provided; and be cognizant of the diversity among plan sponsors.
The industry should press forward with standardization of accounting practices, and the industry should develop standardized appraisal guidelines.
Despite the lack of these important elements, pension funds remain interested in real estate.
According to the survey, 64% of plan to continue to invest in real estate to meet target allocations; 81% plan to increase their overall allocation to real estate; 14% said that, after a hiatus, they will begin to allocate additional assets to real estate; and only 4% plan to abandon real estate altogether.
