The California Public Employees’ Retirement System underperformed in real estate for the year ending December 31, according to a report from its consultant, Pension Consulting Alliance.
CalPERS delivered a 6.8 percent return in real estate for calendar year 2016, falling short of the policy benchmark of 9.1 percent.
The one-year underperformance was attributed primarily to the write-down and sale of non-core and non-strategic legacy partnership interests and emerging markets investments. The former was a onetime event, while the latter “requires close scrutiny and may warrant additional action,” managing directors David Glickman and Christy Fields wrote in the report, which is part of the materials for CalPERS’ investment committee meeting next week.
CalPERS’ real estate portfolio also diverges from its benchmark performance in terms of higher leverage levels; higher amounts of non-stabilized assets; and property types such as housing and land and real estate markets such as Brazil, Russia and China that are not part of the benchmark.
“Each of these elements will provide benefits in some market periods and detriments in others,” Glickman and Fields noted. Last year, the divergent property types and markets were a drag on performance, while higher leverage was “slightly additive.”
To date, CalPERS has not been adequately compensated for the risks it has undertaken in non-core real estate investments, and consequently its current strategic plan has only small allocation in its portfolio to be invested outside of core, according to the report. “Given the liabilities, resources and structure of the system, future non-core investments should be approached with extreme caution,” PCA said.
That said, the consulting firm also highlighted the challenges of investing in core real estate at the present time. During the first half of its fiscal year 2016-17, which began on July 1, CalPERS invested $1.6 billion – less than half of a $4.7 billion approved real estate allocation for the year – continuing a recent trend of fewer capital commitments in the asset class.
“Demand for the types of assets that CalPERS seeks was high and fierce,” Glickman and Fields wrote. “Managers and staff demonstrated good discipline in not chasing acquisitions. The decision making processes continued to be improved, which will reduce the potential for future losses.”
CalPERS held $27.9 billion in real estate, or 9.21 percent, of its total portfolio, as of December 31.