LACERS eyes ‘significant’ cash yields and principal preservation

The Los Angeles City Employees’ Retirement System will put greater emphasis on future real estate fund investments that produce “significant” rental income and preserve the principal commitment.

Revising its real estate investment policy for the first time in four years, the $8.2 billion public pension called for a raft of changes including restricting opportunistic investments to no more than 50 percent of the portfolio, allowing up to 90 percent to be invested in closed-ended commingled funds and increasing the overall permitted leverage for LACERS’ real estate portfolio to top 65 percent.

LACERS said it was also expanding its investment objectives calling for “significant current cash yields”, preservation of principal and greater access to international markets.

Previously, LACERS had allocated up to 75 percent of its portfolio to enhanced/high return strategies, through a broadly defined mix of structures, such as separate accounts, commingled funds, public, private and direct investments, with maximum leverage for the pension’s real estate portfolio set at 50 percent.

However, as LPs across the US evaluate their allocation policies, LACERS said it was also expanding its investment objectives calling for “significant current cash yields”, preservation of principal and greater access to international markets. That comes alongside attractive risk-adjusted returns, increased diversification/reduced risk and inflation-hedging abilities.

Outlining its new policy, which was approved by LACERS’ board at the end of April, the pension investment staff stressed a need for investments to “generate a significant cash return based primarily on current rental income. In general, as a portion of total investment return, higher levels of current income are expected from core and value than opportunistic investments; in contrast, higher levels of appreciation are expected from opportunistic than value and core investments”.

The pension also called for “meaningful risk-adjusted returns without undue exposure to loss of investment principal”. Development and non-operating investments would be limited to no more than 30 percent of the property portfolio, while detailed limits on US geographic locations and property types were also outlined.

LACERS said its minimum commitment going forward would be $10 million, but that no single manager would be allocated more than 25 percent of the real estate portfolio, and no fund commitment could be larger than 15 percent.

In revising its policy, LACERS also changed its real estate benchmark, with private equity real estate investments now judged against the NCREIF Property Index, plus 100 basis points. Benchmark returns were previously not specifically addressed, though the overall real estate asset class was expected to return the NCREIF Property Index, plus 200 basis points.

Fund managers, however, were not the only party affected by the new rules. Pension staff and board members were also given “more accurately defined and measurable roles and responsibilities”, with consultants also expected to be “evaluated annually”.