real estate investments

Kansas Pension Plans To Commit $350 Million To At Least Six Real Estate Funds

The Kansas Public Employees Retirement System (PERS) is planning to ramp up its real estate commitments in 2015. The fund will invest up to $350 million in at least a half-dozen real estate funds. More from IPE Real Estate:

The pension fund will split the capital, with $200m for core strategies and as much as $150m for non-core investments.

An increased allocation and separate-account asset sales have given the pension fund substantial core capital to deploy.

Kansas PERS will invest the core capital with its existing core managers: JP Morgan Strategic Property Fund, Morgan Stanley Prime Property Fund, LaSalle Property Fund, Heitman America Real Estate Trust, UBS Trumbull Property Fund and Jamestown Premiere Property Fund.

It could also place capital in a new, core, open-ended fund as it evaluates the merits of adding a seventh core fund.

Non-core capital would be invested in funds targeting assets in the US, as well as Europe or Asia.

Kansas PERS, which typically makes $40m commitments, would consider approving three or four commitments next year.

The pension fund said it believed non-core strategies offered the potential for attractive risk-adjusted returns.

On an unleveraged basis, value-add investments are being underwritten to premiums of 200 basis points or more above core returns, it said.

Kansas PERS said it would continue to target skilled managers focused to their core competencies, rather than those accepting additional risk and new strategies to reach for outsized returns.

The System’s real estate portfolio returned 15 percent last fiscal year.

Surveys: Institutional Investors Disillusioned With Hedge Funds, But Warming To Real Estate And Infrastructure

Two separate surveys released in recent days suggest institutional investors might be growing weary of hedge funds and the associated fees and lack of transparency.

But the survey results also show that the same investors are becoming more enthused with infrastructure and real estate investments.

The dissatisfaction with hedge funds — and their fee structures — is much more pronounced in the U.S. than anywhere else. From the Boston Globe:

Hedge funds and private equity funds took a hit among US institutions and pension managers in a survey by Fidelity Investments released Monday.

The survey found that only 19 percent of American managers of pensions and other large funds believe the benefits of hedge funds and private equity funds are worth the fees they charge. That contrasted with Europe and Asia, where the vast majority — 72 percent and 91 percent, respectively — said the fees were fair.

The US responses appear to reflect growing dissatisfaction with the fees charged by hedge funds, in particular. Both hedge funds and private equity funds typically charge 2 percent upfront and keep 20 percent of the profits they generate for clients.

Derek Young, vice chairman of Pyramis Global Advisors , the institutional arm of Fidelity that conducted the survey, chalked up the US skepticism to a longer period of having worked with alternative investments.

“There’s an experience level in the US that’s significantly beyond the other regions of the world,’’ Young said.

A separate survey came to a similar conclusion. But it also indicated that, for institutional investors looking to invest in hedge funds, priorities are changing: returns are taking a back seat to lower fees, more transparency and the promise of diversification. From Chief Investment Officer:

Institutional investors are growing unsatisfied with hedge fund performance and are increasingly skeptical of the quality of future returns, according to a survey by UBS Fund Services and PricewaterhouseCoopers (PwC).

The survey of investors overseeing a collective $1.9 trillion found that only 39% were satisfied with the performance of their hedge fund managers, and only a quarter of respondents said they expected a “satisfying level of performance” in the next 12-24 months.

[…]

The report claimed this showed a change in expectations of what hedge funds are chosen to achieve. Investors no longer expect double-digit returns, but instead are content to settle for lower fees, better transparency, and low correlations with other asset classes.

Mark Porter, head of UBS Fund Services, said: “With institutional money now accounting for 80% of the hedge fund industry, they will continue seeking greater transparency over how performance is achieved and how risks are managed, leading to increased due diligence requirements for alternative managers.”

Meanwhile, the USB survey also indicated investors are looking to increase their allocations to infrastructure and real estate investments. From Chief Investment Officer:

“Despite the challenges of devising investment structures that can effectively navigate the dynamic arena of alternative markets, asset managers should remain committed to infrastructure and real assets which could drive up total assets under management in these two asset classes,” the report said.

“This new generation of alternative investments is expected to address the increasing asset and liability constraints of institutional investors and satisfy their preeminent objective of a de-correlation to more traditional asset classes.”

The report noted that despite waning enthusiasm for hedge funds, allocations aren’t likely to change for the next few years.

But alternative investments on the whole, according to the report, are expected to double by 2020.

Memphis’ Pension Fund Is Considering Going All-In On High-Risk Strategies

For the last two years, the City of Memphis Pension Fund has been considering an overhaul in investment strategy. The strategy: re-allocating hundreds of millions of dollars from U.S. stocks and bonds into higher-risk investments. That entails increased allocations toward private equity, hedge funds, foreign stocks and bonds and real estate investments.

On August 28, the board that makes investment decisions for the fund will vote on the change in policy.

The board had already voted at its last meeting to allow the fund to double its real estate investments, from 5 percent of its portfolio to 10 percent.

More from the Commercial Appeal:

The strategy, recommended by investment advisory firm Segal Rogerscasey, was introduced to the pension board last week by pension investment manager Sam Johnson and city Finance Director Brian Collins.

It increases loss risk but could lead to bigger rewards.

Collins said the board’s investment committee had been reviewing the changes for two years and that investments in international securities would help the fund achieve its target 7.5 percent return. “So much of the high single-digit and double-digit growth is outside our borders,” Collins said.

The pension board decided Thursday to delay a vote on the investment strategy until at least its next meeting, scheduled for Aug. 28. The board did vote to allow the City Council to consider a proposal to raise the proportion of real estate investment from 5 percent of the pension portfolio to 10 percent.

The strategy might work, Fuerst said, but there’s a risk. “If they don’t accomplish those returns, it would mean the need for sharply higher contributions, or possibly the type of situation you’ve seen in Detroit, where you’ve seen benefit cutbacks.”

Memphis’ Finance Director was quick to defend the proposed changes. Increase allocations in private equity, he pointed out, doesn’t automatically mean more risk.

He also laid out the specific allocations he envisioned the fund making toward various higher-risk, higher-return investments:

Under the plan he presented, the pension fund would invest 4.4 percent of its portfolio in private equity companies, which often specialize in buying troubled companies, turning them around and reselling them for a profit.

The pension would invest 4.2 percent of its holdings in hedge funds, private investment groups run by money managers who pursue a wide range of strategies.

The city would sell some U.S. stocks and bonds, reducing their combined percentage of the portfolio from 73 percent to 49.7 percent.

The pension fund would increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds issued outside the U.S.

As of June, the Memphis Pension Fund was valued at $2.2 billion. As such, even a re-allocation of a few hundred million dollars would result in a significantly altered asset allocation compared to the current distribution of assets.