CalPERS will find it tough to sustain strong real estate returns, consultant says

It is unlikely that CalPERS' $25.6 billion real estate portfolio will be able to sustain the strong returns produced in the last three years, said a report by the $296 billion pension fund's real estate consultant, Pension Consulting Alliance.

The real estate portfolio for the California Public Employees' Retirement System, Sacramento, had annualized returns of 13.4% for the three-year period ended Sept. 30, 148 basis points above CalPERS' custom benchmark, CalPERS statistics show.

The PCA report, which is contained in agenda materials for CalPERS' Nov. 17 investment committee meeting, said sustaining those returns is unlikely because of a challenging and highly competitive investment market.

The report cites increased competition from sovereign wealth funds, high-net-worth investors and other large direct investors in real estate as among the reasons for the potentially declining results. It says persistently low interest rates are fueling the demand for income-producing assets.

In 2011, CalPERS changed the focus of its real estate program to focus on investing in income-producing properties — and away from opportunistic real estate — after suffering massive losses following the crash of the real estate market.

CalPERS spokesman Brad Pacheco said in an e-mail: “We recognize that recent high returns will be difficult to achieve in the current real estate market. Our goals now are to diversify portfolio risk and generate steady, modest gains.”

Separately, CalPERS' investment staff selected incumbent Wilshire Associates and Meketa Investment Group as the two finalists in its search for a general investment consultant, documents prepared for the investment committee show.

Wilshire's current contract expires June 30; the new contract will be for five years.

The investment committee is expected to conduct interviews for both firms at its Dec. 15 meeting. A final selection will be made at the meeting after the interviews.

The documents show that Meketa's fee proposal is $10.8 million, compared to Wilshire's $15.7 million in total for a five-year contract period.

That price advantage has given Meketa a score of 446 points in CalPERS' scoring system, compared to Wilshire's 379 points.

But the interview is worth up to 500 points, which will be a key factor in deciding which firm gets the contract.