PREA 2009: Maryland shifts towards RE funds

The $26bn Maryland State Retirement Agency has been cleared to unwind its direct real estate investments – on the basis that the pension is not ‘big enough’ to pursue such a strategy – and will instead focus on funds and REITs.

The Maryland State Retirement Agency plans to unwind its direct real estate investments in favour of commingled funds and real estate investment trusts, chief investment officer Mansco Perry said Wednesday during the 2009 PREA conference.

The $26 billion state pension fund currently splits its real estate allocation between all three vehicles, but last month received approval to change its strategic direction. “We will be getting out of direct real estate as we don’t believe we are big enough to do that,” said Perry, who was participating on a panel regarding repositioning portfolios. “There will be a greater focus on funds [and REITs].”

Maryland’s allocation to real estate is currently 7 percent, with a long-term target of 10 percent. Perry expects the allocation to go down before it goes up as the pension unwinds its properties, and said that the shift away from direct investing is a five- to 10-year proposition.

Meanwhile, unlike its under-allocated counterpart, the Rockefeller Foundation is currently constrained by the denominator effect, chief investment officer Donna Dean said during the same panel. The foundation currently has a 17 percent allocation to real estate, in excess of its 15 percent target.

The Rockefeller Foundation’s allocation to alternatives stood at 45 percent in June of 2007 and spiked to 60 percent by January 2009.

“New commitments to those asset classes will only involve re-ups with selective managers,” said Dean, who added that no one effectively modeled for a scenario involving zero distributions. Investors are now dealing with the downside of focusing on maximising returns without paying enough attention to risk.