The California Public Employees' Retirement System is still feeling the pain of real estate investments made at the height of the market after reporting losses on its property portfolio of more than 30 percent in the third quarter alone.
The public pension fund’s real estate portfolio returned -30.1 percent in the three months to the end of September – and -48.7 percent over the past year.
A performance report due to be presented to CalPERS’ investment committee next week added the real estate portfolio was underperforming its benchmarks across the board owing to deals closed and funds invested in at the height of the market in 2006 and 2007.
PCA real estate performance review, to end September 2009
As a result the pension had terminated – or was in the process of terminating – a “number” of property fund managers whose “performance and judgment proved to be well below expectations”, the Pension Consulting Alliance (PCA) report said. 
The combination of the significant underweight to real estate and distressed market conditions indicate that 2010 may be an excellent time to begin looking at new acquisitions that are consistent with CalPERS’ new investment policy.
CalPERS has already lost one high profile real estate relationship, MacFarlane Partners. The firm resigned as sole advisor of the California Urban Investment Partners (CUIP), a joint venture between CalPERS, Earvin “Magic” Johnson's Johnson Development Corporation and MacFarlane in October.
Despite the report's grim reading though, PCA offered one glimmer of hope. The consulting firm said the pension, which has an actual allocation to real estate of 6.9 percent against a target of 10 percent owing to rising stock values and falling property prices, could start investing again next year.
“The combination of the significant underweight to real estate and distressed market conditions indicate that 2010 may be an excellent time to begin looking at new acquisitions that are consistent with CalPERS’ new investment policy,” the report said.
CalPERS’ performance has continued to deteriorate because the pension’s property portfolio is heavily weighted towards non-stabilised, non-income producing assets, backed with high levels of leverage.
PCA said investment officials were attempting to delever fund assets, but admitted “distressed debt situations … pervade the portfolio”.
CalPERS’ 10-year returns for its total real estate portfolio was 4.4 percent against a benchmark of 8.9 percent. Meanwhile, returns for the pension’s separate account assets and commingled funds, to the end of June, were down 39 percent on the same period in 2008, valuing the portfolio at just $13.4 billion.
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