Real estate returns at CalSTRS fall short of the mark…(3)

The second largest US pension plan said returns for real estate during fiscal year 2011-2012 fell short of an industry benchmark and were down from a 17.5 percent return the previous year.

The California State Teachers’ Retirement System (CalSTRS) said its real estate return stood at 9.2 percent for the fiscal year ending June 30, underperforming its 13.2 percent benchmark – the NCREIF Property Index – by 4.2 percent. The underperformance of the asset class reflected generally flat investment returns at the pension system, which reported a 1.8 percent overall return rate – significantly lower than the actuarial assumed rate of 7.5 percent and 150 basis points below the policy benchmark of 3.3 percent.

The $150.6 billion pension plan’s fiscal year 2011-2012 performance was considerably weaker than its results for the 2010-2011 fiscal year, when CalSTRS posted a 17.5 percent return for real estate. That year, the pension plan’s real estate portfolio outperformed the NCREIF index and contributed to an overall 23.1 percent return – its highest in 25 years.

“This fiscal year has presented a very difficult market for long-term investors like CalSTRS, with wild fluctuations amid ongoing instability in Europe, slowing growth in China and India, a US credit rating downgrade and a sluggish economy,” said chief investment officer Christopher Ailman in a statement. “The coming year presents us with many of the past year’s challenges. Short-term speculators risk day trades to time the market, but large institutional investors are challenged to generate sustainable returns in such an environment.”

CalSTRS has a long-term return goal of 8 percent to 9 percent for real estate, which is based on a combination of quarterly cash flows, quarterly appraisals and sales. Despite “muted” valuation gains as compared to last year, the pension plan expected that it would meet or exceed its return goal, according to its fiscal year 2012-2013 investment business plan, which was released last week.

CalSTRS pointed to a direct sales programme that was started in late 2011 to increase its cash flow and lower its allocation in the asset class, currently at 14 percent, to 12 percent of its overall portfolio over the long term. “This programme, which is focused on selling assets that are aggressively priced, should help CalSTRS to achieve its return goals if assets sell above our internal values,” the pension plan stated in its business plan.

While CalSTRS said it will continue to seek quality core assets, it also noted the significant demand and aggressive pricing for such assets. Because of this, it plans to pursue value-added opportunities to buy quality transitional properties in need of capital infusions that would help to increase occupancy levels. Once stabilised, those assets would be transferred to the pension’s core portfolio or sold, depending on market conditions.

In addition, as it strives to be more cost efficient with tight operational controls, CalSTRS said it will continue to focus on reducing fees and increasing its rights and controls with relation to its real estate investments. “Overall, we continue to favor separate accounts and joint ventures over funds,” CalSTRS noted in its business plan. “This alone will help achieve our goals of lowering fees and giving CalSTRS better terms and conditions.”