Elsewhere at the conference, alternatives managers explained issues related to investing in the U.S. Carlyle Group has become the largest private equity investor in emerging markets, said David Rubenstein, managing director and founder, during a panel discussion on May 2. The firm now invests in 20 emerging and developed countries, he said.
“The U.S. is the single best place to invest, but you can't be centered on the U.S. as we were 10 to 20 years ago to get reasonable rates of return,” Mr. Rubenstein said.
At the same time, U.S.-based real estate investors are also losing their dominance at home, a panel of real estate managers claimed.
“The American investor used to be the guy,” said Barry Sternlicht, chairman and CEO of real estate investment firm Starwood Capital Group. Now foreign investors are coming to the U.S. looking for real estate bargains. Mr. Sternlicht noted that a Dutch pension plan recently bought a building in New York “for 30% off.” He did not provide details.
Institutional investors at the conference spoke of investment risks in the post-economic crisis world. Janet Cowell, North Carolina state treasurer and sole trustee of the $72.4 billion North Carolina Retirement Systems, Raleigh, said the system is investing more overseas so it's not “completely reliant on the U.S.,” during a May 2 panel discussion titled, “The View from Institutional Investors.”
Hazel McNeilage, head of funds management at Queensland Investment Corp., a Brisbane, Australia, investment manager with A$57 billion (US$61 billion) under management, said her firm is “very very focused on diversification” but not by asset-class labels. Instead, QIC executives think about risk drivers and diversify risk, said Ms. McNeilage, who spoke on the same panel as Ms. Cowell.
Ms. McNeilage said that QIC has the capability to make short-term shifts in allocation because it doesn't have a strategic asset allocation, but uses asset allocation ranges instead.
“We think it (volatility) will be here for a long time and it is a more appropriate way to manage asset allocations,” she said.
The portfolios Ms. McNeilage manages feature infrastructure and real estate prominently; she sees opportunity in U.S. real estate right now. QIC's clients also have smaller allocations to private equity, which is included with equities, and is exposed to a broad range of alternatives including music royalties, timber and catastrophe bonds.
“If you go into some of these alternative areas, you have to get in at the right time to capture the risk premium,” she said. ”We are always looking for the opportunities to diversify returns and risk drivers.”
Andy Dillon, Michigan state treasurer, noted that the $51 billion State of Michigan Retirement Systems, Lansing, is 80% funded and that with fixed income earning “very little,” fund officials are searching for enhanced returns. The pension fund already has 20% in private equity and 5% in real estate, and fund officials are starting to move toward absolute return and are looking at global infrastructure.
“Troubled governments around the world will shed (infrastructure) assets,” he said.
Fund officials are attracted to infrastructure because it can produce a 9% to 10% return and the infrastructure assets have 40-year lives, which is a good fit for a pension fund, he said.
Part of Michigan's risk management includes a 15% currency hedge. The pension fund's global equity allocation is 45% domestic, 45% developed markets and 10% emerging markets. The fund has non-U.S. exposure because many large domestic companies do a lot of business overseas, he said.
The $240.5 billion California Public Employees' Retirement System, Sacramento, is looking at portfolio risk, Joseph Dear, chief investment officer, said on the institutional investor panel. CalPERS officials looked at the system's exposure to growth risk, inflation and liquidity risk and the opportunities to hedge out these risks, he said.
“Markowitz's mean variance portfolio optimizer assumes rational investors … and those things do not hold in this world,” Mr. Dear said. As a result, CalPERS needs the capability to make short-term shifts.
Mr. Dear said that the lesson that came out of the economic meltdown is that pension plans have to break away from the pack. “You have to be prepared to be independent,” he said. “That's what makes this job fun.”
At the same time, CalPERS is continuing to stress collaboration with other institutional investors, he said, teaming up for real estate, private equity and hedge fund investments to get better terms and keep expenses down. “The only way to achieve this is if LPs (limited partners) work together,” he said.
Investors also can join together in investments such as infrastructure that pension funds are “particularly suited to make without the typical structure like a general partnership,” Mr. Dear said.