ST. PAUL, Minn. - St. Paul Cos.' pension fund is exiting real estate commingled fund investing in favor of public REITs.
The change moves the $400 million pension fund toward 100% internal management. Only its real estate investments are managed externally.
The fund has about $20 million, or 5%, invested in two real estate partnerships with Allegis Realty Investors, Hartford, Conn., and INVESCO Realty Advisors, Dallas. "My assumption is when these roll over I'll reinvest in REIT shares," said George Lang, vice president-portfolio management. The funds are both due to expire in the next two to three years.
Mr. Lang has been happy with the commingled fund investments despite the rough real estate market in the early 1990s. Through Allegis, it invests in the Aetna Institutional Investors I L.P. fund, a diversified real estate partnership. Through INVESCO, it invests in a mortgage fund.
He said the INVESCO fund did better at the beginning of its term, while the Aetna fund is doing well as it nears the end, in part because Allegis wrote down the values on the properties "earlier than its peers did - to their credit."
The funds are within 20 to 30 basis points of each other in total return since inception, he said.
This month, St. Paul Cos.' pension fund began investing $10 million to $15 million in real estate investment trusts in-house.
In addition to overseeing the pension fund's real estate, Mr. Lang also runs $800 million, primarily in direct real estate investments in offices and industrial properties, for the St. Paul Fire and Marine Insurance Co. Of that, $40 million is in public REITs, mainly of shopping malls and multifamily properties.
The insurer's REIT investments began in 1992. For 1996 through mid-December, the portfolio was up 28% to 29%. In 1995, the portfolio was up in the midteens, which paled in comparison to the Standard & Poor's 500 Stock Index, he said.
Mr. Lang's in-house insurance portfolio is actively managed, investing in the top 20 or 30 REITs in terms of market capitalization.
"Long-term, I expect REITs to be in the midteens (in terms of performance). You shouldn't compare it to the S&P; this is real estate and not stock. We will be comparing REIT performance to the Morgan Stanley RMS index, a REIT index," he said.
For the insurance company, he said, "we see a lot of opportunity on the direct side," but "we won't invest directly in properties in the pension fund."
Going forward, the pension fund's investments will be in real estate bonds, REITs or other tradable securities.
"I think people see the advantages of (REITs). Our internal fund (for the insurance company) has done very well in the last four years. Our pension fund people see the long-term returns that REITs will provide. That's the main reason."
