Miami Pension to Divest from Real Estate Fund

Fund shifts 5% allocation to large cap and fixed-income investments.


Miami’s pension trust is eliminating its investments in real estate funds, according to a draft of recent investment policy changes.

The City of Miami General Employees’ & Sanitation Employees’ Retirement Trust (GESE) has removed a target real estate asset allocation of 5%, and has shifted that into large cap and fixed-income investments. For the quarter ending Sept. 30, 2017, the GESE had a 4% asset allocation in real estate worth $26.8 million.

In a draft of its investment at a trustees’ board meeting last week, a section had been crossed out that previously read: “A portion of the real estate investment may be through an open-end commingled property real estate fund … a portion may also be invested through REITs. The REIT manager may invest up to 7% (at market) in a single issue.”

REITs significantly underperformed the broader market in 2017, as the FTSE NARIET All Equity REITs index gained 8.7% last year, compared to the S&P 500, which closed out the year up 21.8%. And so far this year, the All Equity REITs index is down 4.82%, while the S&P 500 is up 5.58%.

In addition to the elimination of real estate investments, the fund’s consultant suggested the fund make changes to its manager evaluation and review criteria in order to hold its investment managers more accountable for fund performance.

In its evaluation, CSSC Investment Advisory Services said that one of the principal causes of “sub-par” investment performance is the retention of poor performing managers for too long.  It also said that a provision in the GESE’s investment policy statement (IPS) that defines what is considered “good standing” for its active managers “has likely had the greatest adverse impact on overall plan performance.”

According to the policy statement, a manager will be considered in “good standing” if his or her returns during the most recent three-year period is equal to or better than 90% of the median (50th percentile) manager’s return in the appropriate peer universe.

“There is no explanation in the IPS for why a manager performing 10% below the performance of the median manager’s three-year return is acceptable, much less desirable,” said CSSC in its review. “Yet, performance at that level is accepted and poor performing managers that meet it appear to be safe from replacement.”

The firm proposes defining “good standing” as having a composite score ranks in the top 33rd percentile of the appropriate peer universe for the most recent reporting period. It said the 33rd percentile was selected as a “conservative, initial transition step” toward a higher standard.

“The concern is that too many of the Trust’s current active managers would be subject to replacement, if a higher standard is initially applied,” said CSSC. “And, yet, most managers within that 33% would be considered ‘average’ and not truly superior.”

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