The conference was not all about politics; Institutional investors explained the place real estate holds in their overall portfolios. The panel titled “A Conversation with Leading CIOs,” featured Erik Lundberg, chief investment officer of the $8.5 billion University of Michigan endowment, Ann Arbor, and Andrew T. Ward, vice president and CIO of Boeing Co., Chicago. It was moderated by David Druley, a managing director at investment consulting firm Cambridge Associates LLC.
Roughly 49.9% of the University of Michigan's total assets are in return-enhancing asset classes, with the rest of its money in diversifiers such as 14.8% in absolute return and hedging strategies that include 9.5% in natural resources, 11.8% in fixed income/cash and 15% in real estate as of June 30, Mr. Lundberg said.
About half of endowment assets are in equities, including 24% in public equities and 14.7% in private equity, which reflects the return generated by the economy in general, Mr. Lundberg said. Endowment officials' “ambition” for its so -called diversifiers is to create a pool of assets that generate positive returns every quarter, and its inflation-hedging portfolio is expected to alsogenerate returns.
The endowment's 15% real estate allocation is larger than most other endowments of University of Michigan's size, Mr. Lundberg said.
One of the differences between an endowment and other investors such as a corporate pension plan is that endowments need gifts to remain “world-class universities.” The investment office's role is to be “good stewards” of that money.
“We don't have liabilities, but we have to provide a stream of distributions from the endowment,” Mr. Lundberg said.
New opportunities the endowment is considering include direct lending and insurance-related investments.
Mr. Ward noted that Boeing has $95 billion in total retirement plan assets, including a $55 billion defined benefit plan and a $40 billion defined contribution plan. The recession took a chunk out of the pension fund which is now has $70 billion in liabilities. Before the 2008 economic meltdown, Boeing's defined benefit plan was 147% funded.
Boeing's long-term goal is to bring the pension fund back to fully funded, Mr. Ward said.
High pension fund liabilities are “not where a corporate pension plan wants to be. … It creates more risk for the enterprise,” he said.
As a result of its rapid increase in the defined benefit plan liabilities, Boeing executives decided to change the way it managed its assets. It boosted the size of its investment staff to a 20-member investment team today from three- or four-person investment office before 2008, Mr. Ward said.
Twenty-five percent of Boeings investment staff is dedicated to risk. Boeing is trying to manage the pension fund's exposure to intended and unintended risks, he said. An example of unintended risk is counterparty risk.
Boeing also switched to a liability-driven investment model. Boeing groups its real estate investments in what it calls its “return-seeking” assets. Also included in the return-seeking group are private equity, global equities, hedge funds, and other types of real assets. Boeing has a 6% target allocation to real estate.
“We like real estate for its competitive long-term return, stable income and some moderate inflation hedging,” Mr. Ward said.
This has led Boeing to a more core portfolio, with 75% allocated to core and 25% in non-core.
Boeing expects to continue committing more capital to non-core than core.
“We feel we will be rewarded for taking the risk, and we will continue to build up our exposure in the next three to five years,” Mr. Ward said.
In 2008, Boeing was underweight real estate with only 3% of the portfolio invested in real estate compared to its 6% target allocation.
“We had the feeling that real estate was overvalued,” he said. “We were a little bit lucky and a little bit smart.”
Boeing has invested $1 billion in real estate since the beginning of 2010, mostly in private real estate.
It also has liability-hedging assets that include long-duration corporate bonds, Treasury bonds and interest-rate derivatives. Boeing has not yet begun to employ interest-rate hedging.
There are certain asset classes Boeing cannot implement due to its size, including venture capital, and microcap and frontier-based emerging markets strategies. Boeing's pension fund cannot invest enough in these strategies, which have limited capacities, and Boeing executives do not want to be in the position of be buying the entire market. There is also an element of riskin those sectors.
“We might be able to put money to work, but we may not be able to get out when we want,” he said.
One area of risk University of Michigan officials consider is the risk the federal “government is playing with the market,” Mr. Lundberg said.
“I think they will continue. … We have to get used to more government interference,” Mr. Lundberg said.
