Investors Diversified Realty, an Ohio-based manager, has raised $1.5 billion of capital for its open-end vehicle that mirrors the NCREIF Fund Index – Open-end Diversified Core Equity, PERE has learned.

The Teachers’ Retirement System of Texas seeded IDR’s Core Property Index Fund with a $990 million commitment, helping the vehicle achieve a first close on more than $1 billion in January 2019, a source familiar with the fund said.

Since then, the Los Angeles County Employees’ Retirement Association has committed $250 million to the fund, and the Michigan Department of Treasury, the investment fiduciary for the State of Michigan Retirement System, added $25 million. Core Property Index Fund has 12 investors to date, including pension funds, endowments, foundations and family offices, all within the US, the source told PERE. IDR will open the platform to non-US investors next year.

Texas TRS backed the index fund because it provides access to core real estate at scale at a low-cost basis, according to a a newsletter distributed to investment partners in July. IDR charges a management fee between 20 and 40 basis points, PERE understands. Jared Morris, the investment manager who led the transaction for the pension, said the structure allows investors access to greater liquidity. He added that the fund offers the ability to invest passively in core real estate so investors can “focus resources on other areas of the portfolio to generate outsized returns.” Investors also have the option of increasing exposure to specific vehicles within the fund index.

The product is the first index fund designed to provide exposure across the NFI-ODCE, which consists of 24 funds that manage $260 billion of gross real estate assets. The fund is aiming to replicate the returns of the index and is invested in 21 of the ODCE funds on a value-weighted basis. The largest allocation is to the largest fund, JPMorgan Asset Management’s Strategic Property Fund, and there is proportionately smaller exposure to the other vehicles. The three smallest ODCE funds – EverWest Real Estate Investors’ GWL US Property Fund, Goldman Sachs Asset Management’s US Real Property Income Fund and New York Life’s Madison Core Property Fund are not included.

Texas TRS analysis showed that IDR modeled a tracking error of 12 basis points or fewer compared with the ODCE index, a low variation that Morris attributes to the stability of the underlying assets in each fund.

After performing well since the global financial crisis, the funds in the ODCE index have seen a drop-off in performance over the past two years. As of the third quarter, the NFI-ODCE saw a total return of 1.31 percent gross of fees – an uptick from the 1 percent return the previous quarter but significantly lower than the 2.09 percent achieved in Q3 2018. One-year gross returns registered 5.59 percent as of the third quarter, down from 8.68 percent during the previous four quarters. Falling asset appreciation growth since early 2018 has been a drag on the performance of these funds.

Despite the lackluster performance of the ODCE index in recent years, institutional capital continues to flock to its underlying funds. Although some that are overexposed to retail, such as UBS Trumbull Property Fund, have not joined in this success, the products that lean more heavily on logistics and multifamily have investors queuing up for entry. IDR’s Core Property Fund appears to be the latest alternative offering in the evolving core real estate market.