The San Diego City Employees’ Retirement System is moving into core real estate debt in the coming fiscal year, according to materials from its Thursday meeting.
Aon Hewitt, SDCERS’ real estate consultant, advised the pension system to commit $100 million to the strategy for the fiscal year beginning July 1, citing a need “to provide downside protection to the currently all-equity real estate portfolio given the late cycle environment.”
The consultancy also recommended earmarking $40 million in commitments to non-core real estate in the next fiscal year to add diversification and risk mitigation to the overall portfolio.
SDCERS is in the process of winding down its managed account with Deutsche Asset & Wealth Management, with plans to redeploy $150 million of that account capital during the 2018 fiscal year. The separate account revision was approved in January 2016 in an effort to diversify the pension plan’s core exposure and reduce volatility, PERE previously reported. The pension plan has committed $374.3 million to the Deutsche separate account since December 1996.
At the end of 2015, the Deutsche AWM account comprised 20 properties. Three assets have been sold to date, with several in the process of being sold, and another six to eight properties projected for sale in the 2018 fiscal year, according to Thursday’s meeting materials.
In the 2018 fiscal year, SDCERS plans to recycle $150 million of the Deutsche capital into four funds, with $47 million earmarked for a Deutsche REIT fund, and follow-on commitments to three core funds. These include $45 million to UBS Trumbull Property Fund and $34 million each to Morgan Stanley Prime Property Fund and Prudential PRISA.
Apart from its new core-real estate debt allocation and redeployment of the Deutsche account capital, SDCERS does not plan to commit to core real estate in either fiscal years 2019 or 2020. Instead, it expects to commit $40 million to non-core real estate in 2019 and $50 million in 2020, bringing the 2020 forecasted portfolio to 30 percent non-core and 70 percent core, in line with SDCERS’ policy ranges.
SDCERS managed $672 million in real estate as of December 31, according to its most recent investment report. The asset class returned 13.6 percent in 2016, beating its 10.3 percent benchmark. Its overall $7.2 billion portfolio returned 8.5 percent in 2016.