The Los Angeles County Employees Retirement Association (LACERA) plans to begin a search for independent fiduciaries in real estate as one of its main initiatives in the asset class during its upcoming fiscal year, which begins on July 1.
“Staff desires to have a pool of independent fiduciaries available for use when the need for an independent expert is required,” John McClelland, principal investment officer of real estate, wrote in a memorandum to LACERA’s board of investments. “Such a need could arise as a result of a co-investment opportunity or whenever there is a potential or actual conflict of interest between LACERA and one of its managers.”
While LACERA already works with a real estate consultant, The Townsend Group, the pension plan generally relies on consultants to assist and advise on matters relating to its overall real estate strategy or to establish prudent operational policies and procedures. Independent fiduciaries, by contrast, will be expected to advise on specific deals, such as the purchase or sale of a real estate asset, and possibly assist with negotiations on those transactions.
LACERA has not yet begun the search, which still needs to be authorized by its board. The pension plan has not determined the specific number of independent fiduciaries it plans to hire, but it would be seeking more than one. Currently, real estate is the only asset class where the investor plans to conduct such a search.
The pension plan’s other initiatives for fiscal year 2014-15 include conducting an attribution analysis to determine why its real estate portfolio continues to underperform its benchmark. It also expects to eliminate incentive fees for core investments executed by separate account managers, having deemed such compensation as no longer necessary.
Meanwhile, LACERA did not include any specific allocation or commitments in its new real estate investment plan. The pension plan is expected to start the new fiscal year with a real estate allocation of 10.2 percent, slightly above its target allocation of 10 percent. Despite reaching its target, however, LACERA last week approved a $300 million allocation for real estate staff to potentially invest with separate account managers. Such an allocation would enable the institution to take advantage of opportunities that may arise.
Separate accounts remain the primary vehicle through which LACERA executes its domestic real estate investments. In his memorandum, McClelland noted that separate accounts offered flexibility with strategy; control over investment pace and length of ownership; and lower fees than commingled funds.
The pension plan, however, did not anticipate a new allocation of capital or new commitments to commingled funds in the new fiscal year nor did it intend to make any additional international real estate commitments, both on account of LACERA being fully allocated in the asset class. “Nonetheless, staff expects to continue to monitor fund offerings to identify compelling opportunities that may arise,” McClelland wrote in the memorandum.
Despite no plans for new allocations or commitments in real estate, LACERA still anticipates investment activity of $1.5 billion from closing on pending investments; capital investment in properties already owned; investment of capital previously committed to equity and debt managers; and completing prior commitments to commingled funds. Factoring in projected dispositions of approximately $710 million, LACERA’s net investment activity for fiscal year 2014-15 is expected to total $793 million.