The California Public Employees' Retirement System, Sacramento, retained its top spot of defined benefit plans reporting real estate equity. Its assets rose 16% to $25.9 billion. The West Sacramento-based California State Teachers' Retirement System was in second place for yet another year, with its assets rising 1.6% to $22.2 billion.
Much of the increase in CalSTRS' real estate portfolio was due to valuations, said Ricardo Duran, spokesman for the fund. Also, the pension fund's real estate investment managers sold more properties than they acquired, he said.
During the survey period, pension fund investors in real estate started putting assets into higher yielding properties, said Timothy Kessler, principal and managing director at Chicago-based real estate consulting firm FPL Associates LP. Also, investors became more willing to invest outside the U.S. for the first time since the financial crisis. P&I's data bolster that view: Real estate equity assets invested outside the U.S. by DB plans in the top 200 increased 9%, to $28 billion, during the survey period.
Private equity investments of defined benefit plans within the P&I universe remained flat or dropped. Private equity assets of CalPERS were down 3% to $31.3 billion from $32.3 billion. But CalPERS still had the largest private equity portfolio reported in the survey, followed by CalSTRS with $21.8 billion, down less than 1% for the survey period.
“Many large pensions have "maxed out' on their private equity exposure,” said Mr. Fann. “Private equity is suffering the problems of a mature asset class. Most large pension funds ... are concentrating capital with their best performers. They are not adding managers, in some cases, they are aggressively cutting.”
For example, the $282.7 billion California Public Employees' Retirement System, Sacramento, plans to trim the number of private equity managers to less than a third of the 389 managers now participating in the $42 billion program.
Commodities were popular when investors thought the markets would potentially crash. In 2013, investors were more confident about the markets and “reducing commodities is part of that play,” Mr. Ruloff said.
Topping P&I's list of the investors with the most assets in commodities once again was CalPERS, with $3.54 billion in commodities. While that figure is a slight increase from the year-earlier $3.45 billion, many of the other defined benefit plans on this year's list are showing reductions. For example, the Pennsylvania Public School Employees' Retirement System, Harrisburg, dropped to third from second, reporting a decline of nearly 19% to $1.899 billion. And the New Jersey Division of Investment, Trenton, while assuming the No. 2 spot, also is reporting a drop, of 8% to $1.9 billion.
One of the biggest winners among the alternative investment asset classes was energy. Some investors are moving into illiquid energy investments because they are worried about the long-term use of natural resources, Towers Watson's Mr. Ruloff said.
What's more, the investment opportunity is tied to the vast reserves of domestic natural gas, horizontal drilling and hydraulic fracturing, said Mr. Fann. “We believe the capital requirements (for those industries) will exceed $100 billion per year for the next many years,” Mr. Fann said. ”What's interesting is almost all of the large private equity platforms have hired energy teams, and in many cases, are raising energy specific funds.”