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SDCERS to boost RE by $190 million

The San Diego city pension system plans to invest $190 million in real estate by fiscal year 2018.

The San Diego City Employees’ Retirement System (SDCERS) has approved a plan to invest $190 million in real estate over the next four years in order to reach its long-term real estate target of 11 percent. The $5.8 billion pension plan, which currently allocates $570 million of its portfolio, or 9.8 percent, to real estate, will need to overcommit in order to reach its target by 2015 and maintain that percentage over the long run. 

At a September 19 board meeting, consultant Hewitt EnnisKnupp recommended that SDCERS invest $40 million to non-core funds each year in 2014, 2015 and 2016. According to pension documents, the consultant already has begun to search for two non-core managers, either value-added or opportunistic, to add to SDCERS’ portfolio next year. The pension also will allocate commitments to core funds over the next three years, investing $30 million in 2014, $20 million in 2015 and $18 million in 2016.

SDCERS’ current real estate portfolio is composed of a 12.6 percent allocation to public REITs and an 87.4 percentage to private real estate, but the pension plan is targeting a 10 percent public and 90 percent private distribution going forward. Of its private real estate portfolio, 62.7 percent is allocated to core, while 37.3 percent is allocated to non-core. Hewitt EnnisKnupp predicts the private portfolio will be divided into 65 percent core and 35 percent non-core by fiscal year 2016.

In 2013, SDCERS exclusively made non-core investments, committing $20 million to the value-added Mesa West Real Estate Income Fund III in April and another $20 million to opportunistic vehicle Europa Capital Fund IV in August.

The board also proposed changing its real estate manager structure at the September 19 meeting, terminating its individually managed account with Invesco Real Estate due to limited success with the manager. SDCERS will transfer the Invesco assets to Deutsche Asset & Wealth Management and replace Deutsche, its global REIT manager, with EII Capital Management. The pension awarded Invesco a $75 million allocation in 2010, but the manager put just $7.5 million to work in a single transaction over the past three years.