California workout sees 37% real estate loss

The $205bn California Public Employees’ Retirement System focuses on restructuring its real estate separate accounts and ‘letting go’ weak managers, as it reports declines of 37.1% in the year to the end of March.

The California Public Employees’ Retirement System lost 37.1 percent on its $15 billion real estate portfolio in the year to March after writing off and deleveraging much of its investments.

The $205 billion public pension said real estate was the only asset class to witness performance declines over the past year, with CalPERS as a whole reporting gains of 11.4 percent in the 12 months to the end of June.

Real estate is a lagging indicator and only reports to the end of the first quarter, yet despite that it failed to compare to private equity, which gained 30.9 percent over the same period. CalPERS global fixed income portfolio increased by 19.5 percent, while public equities rose by 14.4 percent and commodities, infrastructure, forestland and inflation-linked bonds were up a combined 2.7 percent.

We’re moving back into core properties and accepting managers in whom we have confidence. We’re letting go underperforming managers and looking for the best possible deals as they become available in a still sluggish market.

CalPERS chief investment officer Joseph Dear

CalPERS chief investment officer Joseph Dear said the real estate declines reflected “ write-offs and deleveraging a portfolio that relied too heavily on borrowing at the peak of the bubble in 2005 and 2006”.

The pension’s real estate team had already “completely restructure[ed] 24 separate accounts”, with CalPERS eyeing a move back to core investing – and away from value-added and opportunistic real estate.

“We’re moving back into core properties and accepting managers in whom we have confidence. We’re letting go underperforming managers and looking for the best possible deals as they become available in a still sluggish market,” Dear added.

Neighbouring pension, the California State Teachers Retirement System, has also called for greater exposure to core real estate by an additional 15 percent, following heavy write-downs on its portfolio over the past two years.

Like CalPERS, CalSTRS massively stepped up its investment in real estate value-added and opportunistic funds from 2005, exactly when the global property markets were starting to peak. That gearing up in activity would “disproportionately impact portfolio performance for the foreseeable future”, according to a CalSTRS' semi-annual performance review presented in April by consultant The Townsend Group.

CalPERS has been actively renegotiating much of its private equity and private equity real estate contracts with GPs, and had saved $100 million in fee reductions, according to a statement.

“We’re definitely in the recovery mode,” Dear said. “We’re making good progress as we apply the hard lessons of the financial crisis to improving our investment policies, processes and strategies.”