This past year, the San Francisco Employees Retirement System (SFERS) made the decision to invest in more non-core real estate funds. With its new fiscal year approaching, the $15.6 billion pension system again is looking to change the way it invests in real estate. This time, it is planning to invest in the more broadly-defined ‘real assets’ category.
Not that this is a quick policy shift. In fact, SFERS actually decided to invest in real assets back in 2011 but, since the pension still had The Townsend Group under contract to advise on its real estate investments, it continued to invest solely in real estate. However, with SFERS’ contract with Townsend set to expire, the pension plan is now ready to move forward with the switch—albeit slowly, as SFERS still anticipates investing predominantly in real estate for quite some time.
At its May 8 meeting, SFERS’ board approved a motion to issue a request for proposals (RFP) for real asset consulting services. Potential respondents to the RFP will have until early June to submit proposals. The SFERS staff will finalize recommendations in July or August, and a new consultant will likely be on board as early as mid-September or early October. Townsend, which was selected to run a portfolio of global real assets worth £240 million (€284.2 million; $366.2 million) on behalf of the UK-based Environment Agency Pension Fund in April, is also invited to re-bid.
Although real estate still will be the major—if not sole—component of SFERS’ real asset investment plan, more components, such as timber, farmland and infrastructure, are expected to come into play over time. Ultimately, the pension plan wanted to make the switch to real assets in order to gain more flexibility and to be able to seek a wider spectrum of investment opportunities.
“You can define a lot of things that are classified as real assets as real estate, but this gives SFERS a bit more authority,” one source told PERE.
Indeed, this is a drum that JPMorgan Asset Management has been beating for quite some time. Last year, the firm released a report predicting that the real assets investment category would increase in size and importance in investor portfolios in the next decade and that, in the next 10 years, real assets could rise from an alternative asset class (with an allocation of roughly 5 percent to 10 percent) to a mainstream one (as much as 25 percent).
In addition, in a interview for PERE’s June 2012 issue, JPMorgan’s head of global real assets Joseph Azelby championed the adoption of the real assets investment category, stating that investors don’t have enough real estate and don’t own enough infrastructure or other real assets either.
“Diversification really is the only free lunch in investing,” Azelby said in the interview. “The world has changed, with interest rates at unbelievably low levels and equity volatility quite high. People need to be aware that the way they used to organize and allocate their portfolio is not going to get it done anymore.”
With SFERS now on the hunt for a new real assets consultant, the pension plan is gearing up to follow in the footsteps of such institutional investors as the Teacher Retirement System of Texas, the Dallas Police & Fire Pension System and the Ontario Teachers’ Pension Plan by casting a wider net to seek out more diversified investments.