CalPERS Treads Cautiously Into RE, Seeking $2 Billion Allocation

The California public pension's Chief Investment Officer Joe Dear has continued faith in property, with a goal of achieving steady, modest gains.

(January 27, 2011) — The $226 billion California Public Employees’ Retirement System (CalPERS) is looking to allocate around $2 billion to real estate deals in 2011 with a new strategy of more reasonable returns, reflecting a trend among US funds to pursue real estate more conservatively, following dismal property returns in recent years, the Wall Street Journal reported.

The nation’s largest pension fund is seeking to commit to property after its real-estate portfolio lost nearly half of its value, or more than $10 billion, from July 2008 to June 2009. Its new strategy involves fewer investment managers, with less help from well-known managers such as BlackRock, Hines Interests and Jones Lang LaSalle Inc., according to the WSJ. The fund’s Chief Investment Officer Joe Dear told the news service that since the financial crisis, CalPERS has been reexamining its $15 billion real estate program. He noted that while many funds have decided to stray away from the sector, CalPERS has remained confident in real estate, pursuing the sector for its steady source of income as opposed to superior returns.

Dear asserted that real estate funds “tend to be more in the asset-gathering, fee-generating businesses than they are in the capital appreciation, income-generating business,” according to the WSJ. “We decided to reduce the risk in the real-estate portfolio and increase its income orientation as a risk mitigator,” he said. “The risk in the real-estate portfolio increased steadily as the bubble expanded, and the consequence was substantial capital loss.”

Last week, CalPERS reported a decline of only 5% in its real estate portfolio for the 12 months ended September 30, 2010, its smallest real-estate loss since the financial crisis and perhaps a signal that the sector is slowly rebounding.

The system is planning to commit more capital to separate accounts ­– property portfolios managed by real-estate companies on behalf of CalPERS, the WSJ reported. The California pension is expected to discuss its new strategy in a board meeting as early as February.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742