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CalSTRS to focus on ‘top performers’

The US’ second largest public pension fund says it could cut the number of fund managers it works with as market conditions prompt it to review investment relationships. The pension says it will focus on those who ‘outperform in difficult markets.’

The $176 billion (€110 billion) California State Teachers’ Retirement System (CalSTRS) could reduce the number of real estate fund managers it invests with as it re-evaluates its investment relationships.

The pension system, the US’ second largest public scheme, yesterday revealed it would maintain, and even cut, the number of relationships it has over the next few years with a focus on only “top performing partners.”

The pension is the latest limited partner to streamline the number of firms it works with, after industry professionals revealed the California Public Employees Retirement System (CalPERS) was also seeking to cut its exposure to the number of real estate fund managers over the next three to five years.

In a business plan approved by CalSTRS’ investment committee yesterday, real estate investment officials said the number of relationships being managed had grown from 45 fund managers with a total value of $7.3 billion in 2005 to 63 relationships in 2008 with a total value of roughly $19.5 billion. The number of staff numbers, however, had only increased from nine to 15.

According to a policy document presented to the committee, officials said the “slower pace” of the market was allowing them to “evaluate our portfolio and the relative strengths of our existing partners.”

Real estate has surpassed its target allocation of 11 percent, and is currently approaching 12 percent, the business plan said, resulting in a need for the pension to “focus on the existing portfolio.” The pension said it expected the “the number of relationships [to stay] the same or [get] smaller as we focus on top performing partners.”

The pension also said it would focus on its growing real estate debt program as well as its land and single family housing investments over the coming four to five years, with the real estate portfolio expected to be around $30 billion by 2012. CalSTRS also expected to have formed relationships with sovereign wealth funds “to both grow our domestic platforms and gain access to international partners.”

Peter Schaff, chief executive of LaSalle Investment Management's North America operations, recently told a real estate investment conference in New York that the industry was set for a period of downsizing, with firms raising their first and second funds expected to be the worst affected.

Predicting a raft of “one-fund wonders” he said first-time funds would have a higher “bar” to hit in the future to attract commitments from LPs, with funds needing to offer investors “a really good story, really good credentials. It had better make sense.”

The CalSTRS investment committee yesterday also approved allocating $1 billion to infrastructure as part of a new fixed assets financing program. Investments in energy, transportation, ports, water, communications, healthcare and judicial buildings will be actively considered over the next few years, with investments in California given preferential treatment.

The committee also approved lowering the benchmark for its alternative investments portfolio, from the Russell 3000 Index plus five percent to the Russell 3000 Index plus three percent. Private equity, which currently makes up 10 percent of CalSTRS’ total assets – one percent above its target allocation – is projected to reach 15 percent of total assets, or $34 billion, by 2012.