US - The California Public Employees' Retirement System (CalPERS) has adopted a five-year, "back to basics" strategic plan for its $16bn real estate programme.
The plan, agreed at a Board Meeting yesterday, will focus on income-generating properties, implement restraints on risk and debt and use separate accounts with asset managers.
At least 75% of the portfolio will be invested in US retail, office, industrial and multi-family housing core properties, with most new commitments going to five to ten long-term partners managing exclusive CalPERS real estate accounts.
The fund lost 5% - around $600m - on its real estate portfolio in 2010 and is estimated to have lost $10bn since the global financial crisis began.
"This is a back-to-basics plan that affirms the historic diversifying role of real estate with investment in relatively stable, commercial cash-generating properties," said Rob Feckner, CalPERS Board president.
"Some current portfolio partners will have more of our assets and others will have fewer of them based on their performance in the financial crisis and recession. The market downturn identified the best performers and taught us some hard lessons that are reflected in this strategic plan."
CalPERS will also wind down a "legacy portfolio" of non-core opportunistic assets over five to seven years because they no longer fit the new role of real estate.
The new portfolio will include a tactical sector for repositioning US assets, distressed situations and development, with a target of 15%. The portfolio will have an international growth and income sector in emerging markets like China and Brazil, with an allocation target of 10%.
Real estate investment staff will use moderate leverage across the programme to emphasise the adequacy of net operating income to cover annual debt payments, and maintain a prudent balance of equity and loans in property acquisitions.
Preference will also be given to a separate account model where CalPERS is the sole investor in a partner's fund rather than one of several investors in funds that commingle their capital.
"Separate accounts will give us better alignment with partners, more opportunity to design our relationships with them, and enable us to focus more on fund performance than just asset management," said George Diehr, chairman of the CalPERS Investment Committee.
"The partners who will manage these accounts demonstrated exceptional discipline by selling properties rather than buying them before the real estate market collapsed three years ago."
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