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PA SERS reduces non-core RE allocation

The pension system cut its future allocations and reclassified real estate in an effort to improve the asset class’s risk/return profile.

The Pennsylvania State Employees’ Retirement System (SERS) has reduced its allocation for non-core real estate investments, and reclassified real estate as a separate asset class for the 2016 calendar year, according to documents from the $27.2 billion pension system’s board meeting on Wednesday.

Beginning in January, the pension system will combine its value-add and opportunistic investment categories, which together currently make up 62 percent of the portfolio. SERS plans to reduce allocations to these investment strategies to 40 percent of the portfolio over time and double its core allocation from 20 percent to 40 percent. The pension system also added agriculture to its real estate portfolio, targeting a 5 percent investment.

This updated risk profile “is appropriate given the larger allocation to Real Estate and the desire for more income and liquidity created by SERS’ maturing pension fund obligations,” the pension system said in its report.

SERS also changed its pacing range for non-core funds. In 2016, the pension system plans to commit between $100 million to $200 million annually, and target individual fund commitments ranging from $50 million to $100 million in 2016.

This investment strategy will “build long-term strategic partnerships, improve operational efficiency by reducing the number of funds, and improve SERS’ leverage to negotiate lower management fees,” according to the report.

Next year, SERS also will reclassify real estate as a standalone category, rather than as part of real assets, as part of a move to help improve the strategy’s risk/return profile.

“As a stand-alone asset class, Real Estate is now a more narrowly-defined portfolio which enables more focus when considering investment opportunities, clarifies consultant accountability, and leverages the skill sets of SERS’ investment professionals from other asset classes,” the report said.