The California Public Employees’ Retirement System is planning to grow its infrastructure portfolio by $5 billion in the next three years, increasing the program from $1.8 billion to $6.7 billion by fiscal year 2016-17, according to documents prepared for next week’s board meeting.
CalPERS infrastructure portfolio returned 22.8 percent for the year ended June 30, 2014, beating its benchmark, the Consumer Price Index plus 4 percent lagged one quarter, by 17.2 percentage points. The program has had an even-greater five-year return, 23.3 percent, beating its benchmark by 6.7 percentage points.
During the past year, CalPERS made $682 million in infrastructure commitments and launched its first nondiscretionary infrastructure separate account, a mode of investment that, along with direct investment, the $300 billion pension fund is looking to expand in the coming years.
CalPERS is looking to invest more than $700 million into California infrastructure in the coming years, following a plan approved in 2011 to invest $800 million into the state’s infrastructure. The pension plan has reviewed 73 opportunities and bid on five totaling $1.0 billion during the past three years, but has only invested $136 million to date. Currently, 43 percent of CalPERS’ infrastructure portfolio is invested internationally, primarily in Canada and the United Kingdom.
Separately, CalPERS was advised by its real estate consultant, Pension Consulting Alliance, that returns for its $25.9 billion real estate portfolio are unlikely to be sustained for the medium term. The portfolio had returned 13.9 percent over the one year and three years ending June 30, 2014, beating its benchmark, the NCREIF ODCE, by 121 basis points and 202 basis points, respectively.
The consultant cited increased competition in the market from sovereign wealth funds, high net worth individuals and other large direct investors, as well as persistently low interest rates fueling demand for income-producing assets. PCA also noted that core assets, where CalPERS focuses a majority of its program, appear fully priced, and that occupancy and rent growth lag price increases, not unlike conditions in 2004.
Despite the projections of dimming returns, PCA still thinks that CalPERS’ core properties should continue to perform well relative to the benchmark.
CalPERS committed $100 million to AGI Resmark in September 2014 in an emerging manager venture to invest in build-to-core multifamily assets in the San Francisco Bay Area, according to board documents. The venture is structured in such a way that Resmark serves as the mentoring manager to AGI.