The New Hampshire Retirement System (NHRS) expects to shed its direct property investments in favour of allocating more capital to commingled funds, as it continues to pursue greater diversification within its real estate portfolio. Larry Johansen, NHRS’ director of investments, said he expects all of the pension plan’s direct real estate holdings to be sold off in the next 12 to 18 months, according to draft minutes from this month’s meeting.
The pension plan is selling the properties “to reinvest sales proceeds from individually-owned real estate assets into commingled funds in order to build a more diversified real estate portfolio with better risk-adjusted returns,” a pension spokesman said in an email to PERE.
Individually-owned real estate assets, which are held within separate account portfolios, account for about 2.5 percent of NHRS’ overall portfolio, based on preliminary market values at the end of June. The unaudited value of the pension plan as of 30 June was approximately $5.7 billion, of which real estate represented 7.9 percent.
NHRS has a long-term real estate target of 10 percent, which it voted to increase from 5 percent in April 2008. In September of that year, the pension plan adopted a new real estate policy with the goal of restructuring its holdings in the asset class and increasing fund investments for greater diversification. Additionally, it adopted a long-term goal of allocating 50 percent of its portfolio to core investments and 50 percent to non-core investments, primarily in funds.
As of 30 June 2008, the pension plan had invested $364 million, or about 90 percent of its real estate portfolio, in direct property holdings, and $44 million, or 10 percent of the portfolio, in real estate funds. As of 30 June 2012, however, funds represented about 72 percent of the portfolio.
“NHRS will balance its preference for control against other risk management policies,” wrote The Townsend Group, the pension plan’s real estate consultant, in its fiscal 2009 real estate policy. “In order to diversify its investments, the plan will use collective investment vehicles whenever possible for execution of the real estate programme.” In the policy, Townsend also noted that opportunistic commingled fund investments were one means of the pension generating “superior risk-adjusted returns” with its real estate portfolio.
In its annual investment report for fiscal year 2009, New Hampshire noted that its real estate portfolio generated a -31.7 percent return, underperforming its benchmark of -18.8 percent, and attributed the underperformance to significant write-downs in the values of individual properties.