Real estate rocks Pennsylvania returns

Pennsylvania State Employees' Retirement System significantly undershot its real estate performance targets for 2009, reporting returns of -29.3 percent.

Real estate was the worst performing asset class for the $24.6 billion public pension, which managed to report overall portfolio gains of 9.1 percent thanks to a rebound in the stock and bond markets. Venture capital and private equity were the only other asset classes to report negative performance for the year, posting returns of -14.8 percent and -5.7 percent respectively.

PA SERS’ real estate performance, however, was considerably lower than its benchmark index, the Townsend Stylised Benchmark, which had a one-year return of -19 percent.

In the pension’s annual report, released yesterday, chief investment officer John Winchester said 2009 was a tale of two markets, with the first 68 days of 2009 a “continuation of the market collapse of 2008” and the remainder of the year witnessing a “sharp rebound” in some asset classes.

That rebound, however, was not enough to offset the losses experienced by PA SERS in 2008, he said, and not all asset classes felt the same uptick in performance.

With 60 real estate portfolio investments made through 26 fund managers, PA SERS’ real estate fund was valued at $2 billion, as of the end of 2009. A third of PA SERS’ real estate investments are through commingled funds, while two-thirds is in separate accounts.

The pension also said it paid out $28.2 million in management fees during 2009, together with $3 million in investment-related fees and $244,000 in consultant fees to The Townsend Group. As of the end of 2009, PA SERS’ had $354 million of uncalled commitments to real estate investments.

There is no realistic scenario under which SERS employers will not be facing a sustained period of much higher [contribution] rates. Nicholas Maiale, PA SERS board chairman

PA SERS’ largest asset class is alternative investments, with 24.3 percent of the pension’s entire portfolio taken up with venture capital and private equity commitments. The pension had $2.4 billion and $653.6 million of unfunded commitments to private equity funds and venture capital deals, as of the end of 2009. During 2009, the pension also paid out $133.7 million in management fees to alternative investment managers, $7.4 million in investment-related fees and $1.9 million to Cambridge Associates for consultancy work.

Despite reporting overall investment gains in 2009, the pension warned the -28.7 percent loss experienced 2008 – coupled with the fact retired members and beneficiaries would outnumber active members for the first time at the end of 2010 – would have a “great and probably unsustainable budgetary burden on member employers”.

But with institutional investors in the US increasingly turn towards safer, more core real estate investments questions are being asked about how the pensions will generate enough returns to pay its beneficiaries.

Nicholas Maiale, PA SERS board chairman, said in the report all sides were working to address this “serious fiscal challenge” but stressed: “There is no realistic scenario under which SERS employers will not be facing a sustained period of much higher [contribution] rates.”