The board of the Los Angeles Fire & Police Pensions fund approved measures to reduce the target allocation to real estate investment trusts to 1.5% from 3%; increase the target allocation to private real estate to 8.5% from 7%; eliminate the 2% target allocation to commodities; and establish an initial 2% target allocation to infrastructure.
The approvals were made at the board meeting on Aug. 15, confirmed Joseph Salazar, general manager of LAFPP.
CIO Bryan Fujita confirmed that the investment staff will develop an implementation plan for these changes for the board's consideration at a future meeting.
The fund’s current actual allocations are 4% for REITs, 5.8% for private real estate and 0.8% for commodities.
According to materials included in the packet for that meeting, the board’s general investment consultant RVK recommended reducing the allocation to REITs to 1.5% from 3% and concurrently increasing the private real estate allocation to 8.5% from 7% because it would allow the fund to “capitalize on attractive expected returns in the private real estate market while reducing volatility and correlation with public equities.”
While this change would result in increased investment management fees due to the fee differences between public investments versus private investments, the higher fees are expected to be more than offset by the higher expected returns that may be achievable through private real estate investments, RVK added.
RVK also recommended eliminating the fund’s 2% target allocation to commodities and reallocating it to infrastructure, citing that the “current commodities stock exposure does not align with the initial investment thesis of commodities being an inflation hedge.” Instead, RVK noted, investing in infrastructure “may provide the plan higher expected returns in periods of stable and falling inflation and would have a lower correlation to public equities.”
This change would result also in higher overall investment management fees given that fees paid for private infrastructure funds would be significantly higher than fees paid for the current mix of passive public commodities accounts and private commodities funds, RVK added.
The investment staff of LAFPP estimated that, once fully implemented, these allocation changes are expected to increase annual management fees by approximately $14.9 million, notes in the meeting agenda indicated.
LAFPP currently has net assets of about $31.3 billion, the latest meeting agenda said.
