The California Public Employees Retirement System (CalPERS) is considering an asset allocation implementation plan that will bring the pension plan to its new 11 percent real estate target by July 1, 2015, according to the April 14 meeting agenda for the investment committee. Based on its current size of $287.2 billion, CalPERS may need to deploy as much as $5.7 billion in the asset class in just over one year in order to reach that target. The committee will vote on the plan at its May meeting.
In February, the Sacramento-based pension plan increased its real estate allocation from 9 percent to 11 percent. According to investment committee documents, CalPERS’ actual real estate allocation was only 8.5 percent as of March 25, even lower than the 9 percent weighting it reported in February. Despite this underweighting, CalPERS still plans to reach a 10 percent allocation by July 1, 2014 and an 11 percent allocation by July 1, 2015, maintaining the increased weighting through July 1, 2016.
According to the documents, progress to increase CalPERS’ exposure to real estate has been slow, but the pension plan expects that “real estate market value at fiscal year-end shall experience a significant increase as appraisals are completed” and this increase “should moderate the real estate underweight.” The increase will be used to continue CalPERS’ existing real estate strategy, which focuses primarily on investing in core assets through separate accounts.
Letters to the investment committee from consultants Pension Consulting Alliance (PCA) and Wilshire Associates expressed concern about the pension’s ability to reach its real estate target at such a rapid pace.
PCA took issue with CalPERS’ plans for both real estate and private equity and “does not believe that ‘filling an asset allocation bucket’ just to meet a long-term goal makes sense, particularly for the illiquid and most expensive assets to manage.” The consultant noted that pricing is making it difficult for managers to meet fiscal 2014 capital commitments at expected income-oriented return levels and that CalPERS should be “very cautious and patient in pacing its growth of the real estate asset class to the target levels.” PCA recommended adding a minimum of one more year to the schedule.
Similarly, Wilshire advised against the pace of the plan and questioned whether CalPERS “actually can reach these higher allocation targets in an expedient fashion.” The consultant recommended for “a slower phase-in or the development of a contingency plan for a persistently low real estate allocation.” Wilshire also suggested introducing a second benchmark that is more dynamic and valuation-aware and “recognizes the environment and associated constraints under which the nation’s largest pension plan must operate.”
This aggressive pacing plan follows a string of big stories from CalPERS over the past two months. In late March, the pension plan announced the appointment of Tom McDonough to the role of acting senior investment officer of real assets. McDonagh took over the position vacated by Ted Eliopoulos, who was named interim chief investment officer upon the passing of former chief investment officer Joe Dear in February.
Hear first hand what CalPERS thinks of China inbound opportunities – Ben Meng, Head of Asset Allocation at CalPERS, will join as a speaker at this year's PERE Forum: China in Shanghai on 5-6 June.