The California Public Employees’ Retirement System (CalPERS) has increased its real estate allocation by two percent, bumping the overall target for the asset class from 9 percent to 11 percent of its portfolio. Based on the pension plan’s current $283.3 billion size, the increase could give CalPERS approximately $5.6 billion more to allocate to the asset class on a long-term basis.
The new allocation, which is part of the strategic asset allocation plan approved at CalPERS’ investment committee meeting this week, will go into effect on July 1 at the start of the pension plan’s 2014-2015 fiscal year. The increase will be used to continue the pension’s existing real estate strategy, which focuses primarily on investing in core assets through separate accounts. A CalPERS spokesperson told PERE that it does not yet have a specific timeline for reaching the new target.
While CalPERS’ real estate consultant Pension Consulting Alliance expressed support for the strategy in a letter to the investment committee, general investment consultant Wilshire Associates pointed to the possible difficulties of reaching the new real estate target. Wilshire cited the fiscal year 2010-2011 asset allocation process, in which the real estate target was set at 10 percent but later reduced to 9 percent when CalPERS was unable to reach its original target.
“Over the last three years, real estate and infrastructure have remained expensive and, while staff has provided us with an explanation of why they are confident these higher targets are now attainable, we continue to question whether CalPERS can actually reach these higher allocation targets in an expedient fashion,” Wilshire managing director Michael Schlachte commented in a letter to the committee. The plan also calls for increases in the pension’s infrastructure and fixed income allocations.
The new strategy is the outcome of an asset allocation study that CalPERS conducts every three years. The investment staff proposed three separate allocation portfolios, and the committee selected portfolio A, which had both the lowest expected compound return of 7.15 percent and the lowest expected volatility rate of 11.76 percent. All three options included the 11 percent real estate target.
The allocation approval follows another change to CalPERS’ real estate portfolio made at the February meeting. The committee also lifted the pension plan’s annual real estate investment hard cap. The increase upped CalPERS’ annual limit for the overall real estate portfolio to $8 billion from $7 billion and that of its base core real estate portfolio to $7 billion from $6 billion.
Ben Meng, Head of Asset Allocation at CalPERS will be speaking exclusively live at PERE’s Global Investor Forum, taking place in Los Angeles on 29-30 April. For more information, including details on how to register: visit the forum website.