People - JUNE 12, 2014

LACERS narrows down REIT manager search, approves new pacing plan

by Reg Clodfelter

The Los Angeles City Employees’ Retirement System has narrowed its search for one or more investment managers to actively manage approximately $65 million in a long-only, publicly traded U.S. or global REITS strategy to three candidates: Brookfield Investment Management, CenterSquare Investment Management and Duff & Phelps Investment Management Co. Furthermore, the retirement system recently approved a new real estate allocation and pacing plan that will place a greater focus on core investments moving forward.

LACERS’ search for REIT managers opened on March 5 and closed April 4 after receiving 31 responses, 16 U.S.-focused and 15 global. The three semi-finalists are all U.S. strategies, which LACERS preferred due to better risk-adjusted performance and longer track records relative to global REITS strategies. A final decision is currently projected for August 2014.

LACERS’ REIT investments are housed in its public real assets bucket, which has a target allocation of 5 percent and an actual allocation of 0 percent.

The $13.9 billion retirement system will also be moving forward with a new suballocation breakdown of its real estate bucket. Its target allocation to core real estate has been increased to 60 percent from its previous range of 30 percent to 40 percent, and, in turn, the noncore target has been decreased to 40 percent from its previous range of 50 percent to 70 percent.

The change was enacted because the previous portfolio composition was intended to achieve returns of 10 percent or greater, while LACERS goal for its net real estate and real assets returns is 6.85 percent to 7.0 percent. The retirement system’s real estate consultant, The Townsend Group, believed LACERS did not need to take on the current level of risk to meet the returns it desired.

To meet its new targets, LACERS anticipates investing $60 million and $80 million in core real estate in 2014 and 2015, respectively, followed by an additional $90 million in 2016 and 2017. The retirement system will also consider investing up to $90 million in noncore real estate in 2014 should opportunities arise, as Townsend believes select noncore opportunities are mispriced and should be considered.

Board documents note that, should $90 million be invested in noncore strategies in 2014, it will take between three and five years for LACERS to reach its target portfolio composition, though allocations should be within the system’s tactical ranges following the recommended $60 million in core investments in 2014.

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