SACRAMENTO, Calif. — CalPERS has become the first known U.S. pension fund to set up an internally managed international REIT index fund.
The $209 billion California Public Employees' Retirement System, Sacramento, is parking about $1 billion of its uninvested real estate allocation in an international real estate investment trust index fund pending a search for external active REIT managers. It already has a $431.5 million investment in passively managed domestic REITs.
"Whether we keep it or not will depend on market conditions," said Brad Pacheco, spokesman. "Right now we will continue with the search, and evaluate (the REIT index fund's) future at a later date."
Pension plans, endowments and foundations do not typically invest in passively managed REIT portfolios, said Amy Schioldager, managing director and head of U.S. indexing for Barclays Global Investors, San Francisco. Many large plans are looking at adding REITs to fill out their underweighted allocations to real estate. However, most are considering active strategies.
The majority of the entities that have licensed FTSE EPRA/NAREIT Global Real Estate index are investment managers actively managing their portfolios against the index, said Jerry Moskowitz, managing director, FTSE Americas, New York. The index is owned by FTSE Group, London; the European Public Real Estate Association, Amsterdam; National Association of Real Estate Investment Trusts, Washington; and Euronext Indices B.V., Amsterdam.
"CalPERS is unique because they are managing it internally," and using a passive strategy, Mr. Moskowitz said.
Only Northern Trust Global Investments, Chicago has licensed the index for a passive strategy, he said.
CalPERS' internal REIT index strategy could be a cost-effective way to immediately invest growing real estate allocations, some consultants and money managers say.
Historically, CalPERS invested in domestic REITs and managed the investments internally, Mr. Pacheco said. Launching an internally managed passive international REIT portfolio would "address the current underweight to real estate in CalPERS' asset allocation," a CalPERS staff memo stated.
CalPERS has 5.3% of its portfolio in real estate, three percentage points lower than its target.
One big benefit of an indexed REIT fund is that the added liquidity and diversification over an actively managed REIT portfolio, BGI's Ms. Schioldager said. Institutions investing in REITs in the past preferred active management because managers have bested the index by 50 basis points to 200 basis points over the last two years.
"It has gotten harder for active managers to continue adding value at those levels," she said. "The question is whether those returns will continue in the future."