real estate | Pension360

Ohio Teachers Fund Selling Big Stake in Madison Avenue Skyscraper

The State Teachers Retirement System of Ohio (STRS) is selling a big stake in 590 Madison Avenue, the 1 million square foot New York City skyscraper owned by the pension fund.

The fund will sell a 49 percent stake in the property.

From The Real Deal:

The State Teachers Retirement System of Ohio has put a 49 percent stake in 590 Madison Avenue on the market. The building, which was originally developed as IBM’s headquarters, could fetch as much as $1.5 billion, according to Crain’s.

Ohio STRS will still keep a majority interest in the 43-story, 1 million-square-foot tower. The property on the corner of East 57th Street and Madison Avenue includes a large public plaza.

By selling a stake, the pension fund can capitalize on New York City’s rising real estate prices, according to Crain’s, while still keeping control of an asset that continues to bring in cash. IBM is the building’s largest tenant and occupies 120,000 square feet.

A STRS spokesman talked to Crain’s New York about the decision:

“It is a situation where we would be looking to gauge interest in selling a portion of the building, but we want to retain control,” Mr. Treneff said. Mr. Treneff said that selling a stake would allow the pension fund to capitalize on the city’s soaring real estate prices while still holding onto the majority of what has been a very profitable investment that produces strong cash flow and will likely continue to appreciate.

The skyscraper’s notable tenants include Bain Capital, Morgan Stanley, IBM, Bank of America and Citigroup.

Photo by Sarath Kuchi via Flickr CC License

World’s 4th Largest Pension Fund To Cut Alternatives, Load Up On Domestic Equities

The South Korean National Pension Service (NPS), which manages $500 billion of assets, announced plans to reduce its alternatives, real estate and infrastructure investments to make way for a big increase in allocation to local stocks.

From Chief Investment Officer:

Next year, the NPS will build up its holding of local stocks to more than KRW 100 trillion (US$93 billion), around a fifth of its entire portfolio, according to a paper submitted the country’s National Assembly, the Korea Times reported.

This shift would move 16 percentage points more of its overall portfolio into equities. An additional KRW 60 billion would be held in foreign stocks while real estate and infrastructure allocations are to be reduced, the newspaper said, in order to build equity exposure.

The fund—which receives significant annual cash inflows—said it would also bring down its new spending on both international and local fixed income products.

However, last year, CEO Choi Kwang said he intended to boost the fund’s allocation to overseas assets to 30% over the next five years.

“NPS is working to overcome the limitations of the Korean market,” the annual report stated. “NPS is gradually expanding overseas investments in consideration with its role concerning incumbent effects on foreign exchange markets. It is also sharpening its in-house fund management capabilities through strategic alliances with other pension funds and global asset management companies.”

So far this year, the Korea Stock Exchange’s KOSPI Index is down 4.31%. Over a 12-month period, it is down 3.77%.

NPS’ is planning to allocate 20 percent of its portfolio to domestic stocks; if that target is reached, it would be its largest allocation ever towards local equities.

Lessons In Infrastructure Investing From Canada’s Pensions

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.

CalPERS Chooses Firm to Manage $200 Million Private Equity Commitment

CalPERS announced Wednesday that it had chosen a firm to run its new $200 million private equity emerging manager commitment. The firm: GCM Grosvenor.

From Reuters:

Calpers said the new program would launch by the end of the year via a fund-of-funds vehicle. The pension fund would also invest $100 million in AGI Resmark Housing Fund, LLC, a San Francisco Bay Area-focused multi-family residential apartment development fund.

Calpers considers itself a leader in developing and implementing newly formed firms or firms raising first- or second-time funds, called emerging manager programs. Since 2010, the pension fund has committed $900 million to these types of funds.

Grosvenor, a large independent alternative asset management firm, manages approximately $47 billion in assets and multiple emerging manager programs for large institutional investors, including public pension plans and corporate plans.

San Francisco-based AGI Capital is an emerging manager-led real estate investment company that focuses on enhancing communities while delivering strong market returns for investors and partners.

CalPERS has invested $12 billion with emerging managers since 1991.

Dan Primack: All Alternatives Are Not Created Equal

Pension funds have been receiving flak from all sides lately regarding alternative investments.

The criticisms have been varied: the high fees, opacity, underperformance and illiquidity.

But, outside of official statements from pension staff defending their investments, it’s not often we get to here from the people on the other side of the argument.

Dan Primack argues in a column this week that not all alternatives are created equal—and the fight against the asset class has been “oversimplified”.

From Fortune:

Hedge funds are considered to be “alternative investments.” So is private equity. And venture capital. And sometimes so is real estate, timber and certain types of commodities.

A number of public pension systems have increased their exposure to “alternatives” in recent years, at the same time that they either have curtailed (or threatened to curtail) payouts to pensioners. The official line is that the former is to prevent more of the latter, but many critics believe Wall Street is getting rich at the expense of modest retirees.

The complaint, however, generally boils down to this: Alternatives have underperformed the S&P 500 in recent years, even though many alternative funds charge higher fees than would a public equities index fund manager. In other words, state pensions are overpaying for underperformance.

Great bumper sticker. Lousy understanding of investment strategies.

The simple reality is that not all alternatives are created equal. Some, like private equity, are more tightly correlated to public equities than are others. Some are designed to chase public equities in bull markets without collapsing alongside them (that’s where the name “hedge” name from). Real estate is largely its own animal. Same goes for certain oil and gas partnerships.

Lumping all of them together because of fee strategies makes as much sense as arguing that a quarterback should be paid the same as an offensive lineman. After all, they both play football, right?

Primack uses New Jersey as an example:

For those who want to criticize public pensions for investing in alternatives, be specific. New Jersey, for example, reported alternative investment performance of 14.21% for the year ending June 30, 2014. That trailed the S&P 500 for the same period, which came in at 21.38% (or the S&P 1500, which came in at 16.99%). But that alternatives number is a composite of private equity (23.7%), hedge funds (10.2%), real estate (12.74%) and real assets/commodities (6.12%). The sub-asset class most tightly correlated to public equities actually outperformed the S&P 500 (net of fees).

Would New Jersey pensioners have been better off without private equity? Clearly not for that time period. Having avoided real estate or hedge funds, however, would be a different argument. But even that case is tough to prove until New Jersey’s relatively immature alternatives program experiences a bear market. For example, both hedge funds and the S&P 500 went red last month, but the S&P 500’s loss was actually a bit worse. And macro hedge fund managers actually had positive returns. Does that make up for years of the S&P 500 outperforming hedge? Likewise, should real estate performance receive an indirect bump from recent rises in venture capital performance, just because they are both “alternatives?”

Again, that’s a judgment call that should be based on voluminous data, rather than on knee-jerk anger that alternative money managers are getting paid while retiree benefits are getting cut. If alternative managers are helping to stem the severity of those cuts, then everyone wins. If not, then the state pension needs a change in policy. But, in either case, the specific alternative sub-asset classes should be analyzed on their own merits, rather than as one homogeneous bucket. Otherwise, critics may throw out the baby with the bathwater.

Read the entire column here.

Photo by 401kcalculator.org

CalPERS Dials Up Real Estate; Will Increase Allocation By 27 Percent

CalPERS has beefed up its real estate portfolio this summer, but the fund is far from finished: by 2016, it plans to increase its real estate holdings by 27 percent.

The pension fund says real estate will largely fill the void left in the wake of its hedge fund exit.

From Bloomberg:

The California Public Employees’ Retirement System, the biggest U.S. fund, is increasing investments in real estate by about $6 billion within a year as it begins to exit hedge funds.

The $295 billion fund had 8.7 percent in real estate as of July 31. Since then, the allocation has risen to 9.9 percent, and the fund has set a target of 11 percent in fiscal 2016, according to documents posted on its website.

Calpers began restructuring its real estate portfolio after suffering a 37 percent loss in 2010, when it wrote off speculative residential investments as property values slumped. As part of the overhaul, the fund has focused on core income investments such as rental apartments, industrial parks, offices and retail space.

The shift will mean an increase in commercial real-estate investments by 27 percent, the Wall Street Journal reported.

More details on the strategy from the Wall Street Journal:

[CalPERS] is focusing on investments such as fully leased office towers and apartments in big cities, which it argues are safer because there is established demand for these properties. In another shift, the giant pension fund has been investing almost exclusively through real-estate funds that manage separate accounts created for Calpers, which offers more control over how that money is invested.

Some of Calpers’ real-estate consultants are warning that moving too much money into pricey properties could backfire. Pension Consulting Alliance Inc. cautioned in a July report to Calpers not to expect “these increases in value to be sustained when interest rates and new construction starts return to more normalized levels.”

Ted Eliopoulos, Calpers’ recently appointed chief investment officer, changed the fund’s real-estate approach in 2011, when he led that group. Since then, the fund has delivered average annual returns of 14% in its real-estate portfolio. But Mr. Eliopoulos acknowledges the recent high returns are unsustainable.

The fund’s goals now are to diversify its portfolio risk and generate steady, modest gains, rather than striving for outsize returns with more speculative bets, he said. Likewise, Calpers on Sept. 15 said it would shed its $4 billion investment in hedge funds as part of an effort to simplify its assets and reduce costs.

“Our strategy is to focus on high-quality real estate,” Mr. Eliopoulos said. “We’re still on track.”

CalPERS was a large real estate investor in the years before the financial crisis and frequently saw returns of 30 percent or more within the asset class. But the economic downturn led to losses of $10 billion, or 50 percent.

CalPERS’ CIO, Ted Eliopoulos, maintains that the fund learned from those losses and staff plan to make less speculative investments this time around.

Video: CFO of Canada’s 2nd Largest Pension Asset Manager Talks Investment Strategy

Here’s a 24-minute talk with Maarika Paul, chief financial officer at Caisse de Depot et Placement du Québec, Canada’s second-largest pension fund.

Paul touches on infrastructure, e-commerce and real estate investing, as well as investing in Europe.

The video was taken at the Bloomberg Canadian Fixed Income Conference in New York.

Strong Global Equities Performance Drives Ontario Pension Return

The Ontario Public Service Pension Plan (PSPP) returned 12.5 percent overall in 2013. But a new report from the Ontario Pension Board, which handles investments for the fund, gives more details on the performance of individual asset classes.

Strong global equities performance (37 percent return) drove the fund’s returns in 2013. Reported by Pensions & Investments:

In the pension fund’s annual report released Thursday by the Ontario Pension Board, which administers the defined benefit plan, global equities returned 37% last year, while Canadian equities returned 18%, compared with 35.9% for the MSCI World (Canadian dollar) and 13% for the S&P/TSX Composite indexes.

Real estate returned 12.9% vs. its custom benchmark’s 9.7% return; infrastructure, 12% vs. 0.9% for its custom benchmark; emerging markets equities, 5% vs. the MSCI Emerging Markets (Canadian dollar) index’s 4.3%; and Canadian fixed income, 1.8% vs. -1.2% for the DEX Universe Bond index.

Private equity, which returned 17.8%, was the only asset class to underperform its benchmark, which was 30.2%.

The pension fund’s asset allocation as of Dec. 31 was 28.2% fixed income, 23.7% developed markets equities, 15.5% emerging markets equities, 14% real estate, 8% cash and short-term investments, 7.6% Canadian equities, 2.5% infrastructure and 0.5% private equity.

The plan improved its funded status from 94 percent to 96 percent, according to the report.

The fund handles $18.9 billion of assets.

CalPERS Is Ramping Up Its Real Estate Portfolio. Why?

Last week marked a big shift in investment strategy for CalPERS, and it goes beyond hedge funds. The pension fund’s hedge fund pullout got all the headlines, of course, but CalPERS also decided to invest an addition $1.3 billion in real estate.

The reasoning behind dropping hedge funds has been made clear. But what about the real estate investments? Over at GlobeSt.com, Erika Morphy explores some of the reasons that could be behind CalPERS’ deep dive into real estate.

From GlobeSt.com:

It’s business as usual

It was just real estate’ turn, says Stephen Culhane, who heads the investment management practice at the law firm Kaye Scholer.

“Institutional investors are always assessing and reassessing their allocations,” he tells GlobeSt.com. “Commercial real estate valuations are strong and it is perceived as a bit as a safe haven particularly for non US and long-term investors.”

It’s a shift in investment philosophy – and not just a change in asset allocation

CalPERS handles over $300 billion for over 1 million current and former state employees. Their investing philosophy is transitioning from a classic hedge fund, 60/40 model, to more of an endowment model, says Jeff Sica, founder and CIO of Circle Squared Alternative Investments.

“CalPERS is aiming to reduce volatility and obtain a more predictable annual return across their portfolio,” Sica tells GlobeSt.com. “Their move into real estate provides them with stability and a quantifiable income stream. With reduced volatility and a stabilized annual return, it will be more beneficial to them in the long run instead of fluctuating with the equity market,” he says.

Hedge funds have lost their appeal.

Despite CalPERS careful explanations, this is the theory of Bill Militello, co-founder and CEO of Militello Capital.

“The increasing trend of moving away from hedge funds is due in part to their lack of transparency and a lack of understanding of the investments—they are intangible,” he tells GlobeSt.com. “Hedge funds are simply public securities in a different wrapper, they are not an asset class, they are a compensation scheme.”

There is also evidence that hedge funds on an overall basis have actually underperformed versus passively managed funds, Chauncey M. Swalwell, partner with Stroock & Stroock & Lavan LLP, tells GlobeSt.com—”making the relatively high fees typically paid to hedge fund managers untenable at CalPERS.”

It is an inflation hedge

This is the flip side of fund’s decision, Militello adds. “Properly purchased real estate in supply constrained markets with built in demand drivers provides access to well-insulated investments that protect against rising interest rates.”

There isn’t space here to list all the potential reasons listed. You can read all seven reasons here.

LACERS also committed an additional $190 million to real estate investments last week.

Report: Maryland Fund’s Below-Median Returns Coincide With Shift to Alternatives

The Maryland State Retirement and Pension System experienced a 14 percent return in the 2013-14 fiscal year. The fund’s then-Chief Investment Officer, Melissa Moye, touted the returns as “strong” – but a new report suggests not only that those returns were below-median level, but also that they were driven by a shift in investment strategy that put more money in alternative investments.

From David Sirota at the International Business Times:

According to [report authors] Walters and Hooke, a former Lehman Brothers executive, that shift [of assets to Wall Street] coincided with below-median returns for Maryland’s public pension system.

“Ironically, as the fund’s relative performance has declined, its Wall Street money management fees have risen,” the report says. “In fiscal year 2014 alone, the Maryland state pension fund paid out roughly $300 million in fees to Wall Street money managers. Over the past 10 years, these money management fees amounted to over $1.5 billion, according to the fund’s annual financial reports. Nevertheless this high-priced advice resulted in 10-year returns that were $3.22 billion (net of fees) below the median.”

If the fund had matched medianreturns for public pension systems across the country, “the state could have awarded 80,000 poor children with $40,000 four-year college scholarships,” Hooke and Walters wrote.

Maryland’s shift into alternative investments happened while the securities and investment industries made more than $292,000 worth of campaign contributions to Democratic Gov. Martin O’Malley, who appoints some members of the Maryland pension system’s board of trustees. Vice News has reported that the Private Equity Growth Capital Group is a financial backer of a 501(c)4 group co-founded by O’Malley. In May, Pensions and Investments magazine reported that the Maryland governor appointed a managing director of an alternative investment firm called The Rock Creek Group to head a state task force on retirement policy.

Meanwhile, the chief investment officer of Maryland’s pension system was recently appointed to a senior position in the U.S. Treasury Department overseeing public pension policy.

“Eliminating active managers, selling alternative investments, and adopting indexing for 90 percent of the state’s portfolio would ensure median performance,” his report concludes. “These actions would also save the state huge amounts in money management fees.”

Hooke has testified in front of lawmakers advocating the increased use of index funds in pension investments – a strategy that would have worked well the last 4 or 5 years, but one that offers little protection against market contractions.

Since 2008, Maryland has more than doubled its investments in private equity, real estate and hedge funds. Those asset classes made up 29 percent of its portfolio in 2013.

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712