AMERICAS NEWS: Moving target

Earlier this year, the California Public Employees’ Retirement System (CalPERS) set a seemingly impossible goal for itself: spending more in real estate than it had the previous year. 
 
In February, the largest US pension plan adopted a new asset allocation plan that would call for increasing its real estate allocation target from its current 9 percent to 11 percent by July 1, 2015. 
 
The numbers, however, indicated that hitting such a goal might be a tall order: CalPERS had allocated a whopping $5.7 billion to its real estate managers in fiscal year 2013-14, and $4 billion the previous fiscal year. Despite these garganutan amounts, it was still underallocated to real estate, with an actual exposure of 8.5 percent as of March 25. 
 
CalPERS, however, recently indicated that it may be on track to reach its target after all. In documents from its investment committee meeting last month, the pension plan revealed that it is now expecting to deploy $6.6 billion of commitments to joint ventures with more than a dozen real estate managers during its new fiscal year, which began on July 1.  
 
Such a massive allocation in real estate would significantly bolster its efforts to comply with the new asset allocation plan and achieve its new target in the asset class. As of June 30, CalPERS had invested $25.9 billion, or 8.5 percent of its total portfolio, in real estate, against an interim target of 9 percent. Assuming all other factors remained equal, the anticipated commitments for fiscal year 2014-15 would bump up the pension plan’s real estate allocation to $32.5 billion, or 10.8 percent of its total portfolio, which currently stands at $300.3 billion.
 
Of course, that is in theory only. CalPERS’ allocation targets for real estate and other asset classes, after all, are perennial moving targets. As the size of its total portfolio increases, so will the amount of capital that the pension plan will need to allocate to real estate to hit its investment goal. Meanwhile, as CalPERS moves to invest more of its capital into lower-risk core strategies, it is slowly liquidating its legacy opportunistic investments, which will thereby reduce its overall property holdings. 
 
Eric Baggesen, CalPERS’ senior investment officer of asset allocation and risk management, and Ted Eliopoulos, then interim chief investment officer, noted in an asset allocation document in April that both of these factors were reasons why “progress on increasing asset exposure has been slow” in the asset class. The distributions that CalPERS is likely to receive from its existing real estate investments also is yet another factor that could partly offset the billions it is preparing to push into real estate. 
 
Additionally, Baggeson and Eliopoulos had anticipated that the market value of its property portfolio at fiscal year-end would rise substantially as appraisals were completed, which would in turn help to counteract its underexposure in the asset class. But the pension plan had in fact seen no change to its allocation in real estate as of June 30, the end of its previous fiscal year.
 
That said, the pension plan’s anticipated real estate allocations for the new fiscal year at least partly addresses concerns from its consultants that it would not be able to achieve its new targets. In an April letter to the chairman of CalPERS’ investment committee, Wilshire Associates managing directors Michael Schlachter and Andrew Junkin noted that the pension plan had struggled over the last few years to reach targets that were higher than the current allocation level, and in the 2010-2011 fiscal year, actually had reduced its original real estate target from 10 percent to nine percent.
 
Of course, drafting an outsized investment budget for external managers for fiscal year 2014-15 represents the first crucial step by CalPERS toward increasing its real estate allocation, but it is in the first step in one of many. The pension plan has yet to make any actual commitments in real estate for the new year, for starters, and then its real estate managers will have to actually invest the capital before it will count toward the allocation. With some of the managers anticipated to receive more than $1 billion of additional capital to invest on CalPERS’ behalf, it’s also unclear if those firms will be able to deploy those allocations in time for the July 2015 deadline.