Cerulli Associates estimates that target-date funds in defined contribution plans will grow to $1.5 trillion by 2015 from an estimated $426 billion so far this year.
“It's good to have access to real estate, but REITs only make up 10% of the commercial real estate universe; most of the universe is privately held,” Mr. Skinner said. “By adding direct real estate, it adds to the risk-reward profile and dampens the volatility of REITs because REITs correlate to equities.”
Some 70% to 75% of Prudential's portfolio is direct real estate, including core, value-added and opportunistic, and between 20% and 30% in REITs. Roughly 2% to 3% is in cash. The strategy gets its liquidity from the REITs and cash. The direct real estate portion is invested in Prudential's open-end funds: PRISA I. II and III.
“Daily valuation has been managed in the strategy, which is very very important to defined contribution plans,” Mr. Skinner said.
It could not be learned by press time how much Prudential managed in the strategy, but Mr. Skinner said it is being used by 13 plans, which he would not identify.
The strategy's return objective is to exceed a customized benchmark of the NCREIF Open-End Diversified Core Equity Fund, the S&P Developed Property and the CitigroupU.S. Domestic 3-Month T-Bill Total Return indexes.
As of March 31, the strategy underperformed the benchmark for the five- and three-year periods, primarily because of the challenging markets of 2008 and 2009, but it outperformed the benchmark for the 12-month period, John Chartier, Prudential spokesman, said in an e-mailed response to questions.
JPMAM also is offering a direct real estate strategy for defined contribution plans, both in its own target-date funds and to other target-date fund managers and plan sponsors for custom target-date funds, said Dave Esrig, New York-based managing director and defined contribution portfolio manager at J.P. Morgan.
Three-quarters of the assets are invested in the firm's open-end funds, mostly in core funds. The rest is invested in a J.P. Morgan REIT fund and cash, Mr. Esrig said.
The strategy includes U.S. REITs because they are an extra source of liquidity and REITs offer another way of pricing domestic real estate, Mr. Esrig said.
Mr. Esrig said J.P. Morgan has gotten a few new DC clients this year and projects that the strategy will have $300 million in assets by year end. J.P. Morgan has been offering the strategy for five years.
One of the first plans to offer target-date funds that included J.P. Morgan's direct real estate investment strategy was the Los Angeles County Deferred Compensation Plans, comprising a $12.6 million (401k) plan and a $59.6 million 457 plan. The plans' target-date funds are custom made using existinginvestment managers, William Yuen, finance analyst for the plan, said in an e-mailed response to questions.