AMERICAS NEWS: A San Francisco treat

The San Francisco Employees’ Retirement System is not only increasing its allocation to real estate, it also is looking to invest more in opportunistic and value-added products. PERE Magazine, June 2012 issue

Following Lindsey Adams’ promotion to head of real estate at the San Francisco Employees’ Retirement System (SFERS) earlier this year, the $15.6 billion pension plan appears to be making good on its plan to increase its allocation to real estate and put an added focus on opportunistic and value-added strategies.

At its May board meeting, SFERS approved a plan to allocate as much as $400 million to non-core managers for its 2012/2013 fiscal year. In addition, the pension plan approved a plan to increase its allocation to its public core portfolio, currently at $150 million, by an additional $50 million to $200 million.

The pension plan has a 12 percent target allocation to real estate, according to Robert Shaw, SFERS’ managing director for public markets. As it stands now, the pension plan is investing approximately 57 percent of its real estate allocation in core strategies and 43 percent in non-core investments. Moving forward, the retirement system plans to target 60 percent in non-core real estate and 40 percent in core. However, Shaw told PERE that transition is “going to take some time.”

Given that SFERS expects the commercial real estate market to recover, the time has come to enter into opportunistic and value-added investments, Shaw explained. In addition, being a relatively small investor enables the pension plan to diversify its real estate portfolio more, he noted. However, that doesn’t mean that it’s completely excising core from its investment plan.

“Because we’re smaller, we’re more nimble and can look at the smaller value-added and opportunistic funds,” Shaw said. “That said, we’re not going to put all our eggs in one basket. We’re putting a reasonable amount in core.” 

Ultimately, however, SFERS intends to pursue higher returns via increased value-added or opportunistic investments. “What we’re doing is finding niches in which there’s still a chance for making returns,” said Shaw. “We’re looking to find stuff that’s trading cheap for some misguided reason, buy it, improve it and then sell it.”

In 2011, SFERS’ real estate portfolio returned 19.7 percent, much higher than its target of 8 percent. Looking forward, the pension plan is targeting returns of 9 percent to 15 percent.

So far this year, SFERS has made two commitments totaling $75 million to commingled close-ended real estate vehicles. Sources revealed that SFERS currently is eyeing another real estate fund and anticipates a contribution to that vehicle in late June or early July.