CalPERS Staff Real Assets Review
The meeting began with the internal review of the real asset program, highlighting the reorganization of the three programs (real estate, infrastructure, and forest land) in July of 2015. This was done with the goal of increasing knowledge transfer among staff, and helping to create consistent investment decisions. Of note is the review of the current 2011 strategic plan, which will be occurring in the spring of 2016. Other points of interest are the mantra of the so called “2020 plan”, which calls for “Repeatable, predictable, and scalable” investment strategies, the need to “reduce complexity” by reducing the number of asset managers CalPERS is partnered with, the increased integration of ESG, as well as the monitoring and benchmarking of carbon footprints in the infrastructure asset class. The investment philosophy of the current plan calls for 75-90% of NAV to be invested in high quality, well allocated assets, with the intent on holding them long term, through multiple business cycles, with less focus on traded assets.
Following this introduction was the performance review, beginning with real estate, which has our performed target returns for four consecutive years. NAV of real estate accounts for 9.1% of the total fund, with an intended percentage of 10%. Infrastructure likewise has been performing well despite fierce competition for investment, surpassing its target return substantially (13.2% vs. 3.9%), though it is short of its intended allocation (.7% of the fund vs. targeted 1%). The allocation of investments within the class consists of: 50% power, 28% transportation, 13% energy, 5% water, 3% other, 1% communication, and 0% waste. Forest land was last, and has been consistently underperforming across all periods by a significant amount (-.3% return vs. 10.6%v target last year), despite being close to its intended allocation. The program will be under review during the 2016 spring strategic plan meeting.
PCA – Real Estate Review
After the internal review came the reports from the individual program consultants, with PCA giving their assessment of the real estate program first. As in the internal performance review, PCA highlighted the higher-than-targeted returns for the real estate program. Things such as greater exposure to income producing assets, and less investment in highly leveraged opportunistic strategies were attributed to diverse opinions and investment perspectives in the decision making process, brought on by the reorganization of the real asset program, in accordance with the 2011 strategic plan. PCA believes CalPERS’ real estate portfolio to be strong enough to withstand the next real estate market correction, though given the strength of the market, its hard to know when that would be.
While the overall outlook of the report was positive given the high returns and increasingly low risk portfolio, PCA highlighted several potential problems. One such problem is the current strength of the market, which has the unintended downside of making it harder to identify which assets would be the best to hold long term, a key component of the 2020 plan mentioned by the internal review. Another was the implementation of ESG initiatives, which they believe need to be more disciplined. As was mentioned in the internal review, the increasingly competitive nature of investment in the types of real estate assets that meet CalPERS objectives is becoming more of an issue. Lastly, PCA noticed two problems related to the managers that are partnered with CalPERS. First was the lack of training for successors to the current managers in the smaller firms, which would pose a problem when the current managers retire. Second was the difficulty of attracting high quality managers away from competing private firms with CalPERS’ drastically different employee compensation practices.
Stepstone – Infrastructure Review
Following PCA was Stepstone, with a review of the infrastructure program. Like the real estate program, the outlook was generally positive, with the returns exceeding their targets, despite being below the intended percent of total NAV. Stepstone believed infrastructure to be a very desirable asset class for long term holding (in accordance with the 2020 plan), with lots of money being diverted from other asset classes. The side effect of this is again, an increasingly competitive environment for investment. Current investment were focused on cost and cost management, at the cost of a lower return. One problem seen by Stepstone was the lack of a track record of Private-Public Partnerships in the US.
Wilshire – Timber Program
Lastly, Wilshire gave their assessment of the forest land asset class. As was stated in the internal review, the returns from the forest land class have been consistently well below the targeted rates. Wilshire believed this to be because CalPERS’s holding in forest land were too small to meet the set targets. Despite this, Wilshire believe forest land to be a perfect asset class for pension investment, due to its long lived nature, and its tie to inflation. With the re-evaluation of the 2011 plan occurring this spring, Wilshire recommended either committing, and increasing holdings, which would take around 10 years, or exiting the market and liquidating their current holdings.