San Diego City Employees' Retirement System committed $30 million to open-end core real estate fund Morgan Stanley Prime Property Fund, managed by Morgan Stanley Investment Management, said an investment committee action summary.
Morgan Stanley Prime Property Fund targets high-quality, well-leased, income-producing properties located in primary U.S. markets. The fund targets an annual gross return of 8% to 10%. The fund's entry queue was $1.5 billion as of March 31, so it is expected to take two to four quarters to invest the commitment, according to a staff report for the July 8 board meeting.
Funding for the commitment came from the $6.8 billion pension fund's separate account with Deutsche Asset Management.
The board separately approved liquidating the $358 million real estate separate account with Deutsche Asset Management and investing the assets in more diversified core real estate funds. The board in January approved reducing Deutsche's separate account to 35% of the real estate portfolio.
Deutsche's separate account was established in 2004 and currently accounts for approximately 50% of the total real estate portfolio.
Though the separate account has added value over time, it creates an unintended small-cap bias in the real estate portfolio that increases the volatility of returns, said an Aon Hewitt Investment Consulting report. Aon Hewitt, the plan's consultant, and pension fund staff are expected to recommend a liquidation plan to the board in a subsequent meeting.
