CalPERS plans to shift its $15.4 billion real estate portfolio to mainly domestic, core or stable-income producing real estate, run by managers in separate accounts, according to the $226.5 billion system's new real estate strategic plan.
CalPERS also expects over the next three years to phase out REITs, which currently comprise 7% of its real estate portfolio, according to the plan.
The investment committee of the California Public Employees' Retirement System will consider the new plan at its Feb. 14 meeting.
The real estate portfolio would be divided into existing or “legacy portfolio,” with an estimated $6.8 billion in assets, and a new portfolio, with an estimated $8.6 billion in assets. The new portfolio would include some existing investments as well as investments managed by 15 to 30 new managers.
Clark McKinley, spokesman for the Sacramento-based system, said the system was in no hurry to hire new managers.
“It's likely that most new commitments for real estate will go to about a half-dozen long-term strategic partners. These are the partners who performed relatively well during the financial crisis and recession, compared with their peers in the CalPERS real estate portfolio,” Mr. McKinley stated in an e-mailed response to questions.
CalPERS could be investing as much as an additional $1.5 billion in new real estate commitments with such partners in the coming months this year, he wrote.
Under the plan, no less than 75% of the new portfolio will be in moderately leveraged core investments with no more than 25% in non-core investments. In the non-core allocation, 15 percentage points would be domestic and the remainder would be international, mainly invested in the emerging markets “in order to capture the demographic shifts in countries such as Brazil, India and China,” according to a report to the committee on the plan by Pension Consulting Alliance, CalPERS' real estate consultant.
Most of the investments in the new portfolio will be in “separate accounts overseen by the real estate unit. … This structure provides for more influence on the overarching strategy of individual investment mandates that are managed by third-party fiduciary advisers,” according to the PCA report. CalPERS may also invest in operating companies, the report said, but the investment committee will consider that at a later date.
Most current real estate investments, the “non-conforming legacy assets,” will be placed in a portfolio overseen by a separate portion of CalPERS' real estate staff. Those staffers will decide whether to retain the managers, wind down investments or wait until the life of the investment is over. PCA expects that process of “optimizing” the legacy portfolio will take three to five years.