Largest US Pension Fund CalPERS to increase allocations to non-core Real Assets strategies

By Muskan Arora

The $501.39 billion California Public Employees’ Retirement System plans to expand their non-core real assets strategy, by focusing on commingled funds and co-investment strategies.

The system has effectively “repositioned the real estate portfolio and is now in a place where we can look to move up the risk curve and selectively increase exposure to non-core managers,” as presented by Sarah Corr, CalPERS’ managing real assets investment director.

Within its $66.4 billion real assets sleeve, the system allocates 75.8% or $50.3 billion to real estate, 23.7% or $15.7 billion to infrastructure and 0.5% or $0.3 billion to forestland.

“The core real estate portfolio has met or exceeded the benchmark for 10, 5, and 1-year time periods. However, the non-core segments have underperformed in all time periods as majority of exposure is legacy assets which are dispositioned candidates,” she added.

The core real estate returned -8.2% against a benchmark of -12.6% for 1 year, 5,6% against a benchmark of 4% for three years, and the five-year return was 5.1% against the benchmark of 3.3%.

“We will continue to focus on best-in-class managers and seek to prudently add more non-core managers to both real estate and infrastructure portfolio. We will do this in a cost-efficient way by focusing on co-investment vehicles,” she added.

Due to market variables including inflation and higher interest rates, the real estate transactions are experiencing material decline in volume with “wide bid-ask spreads”, as rising interest rates put a downward pressure on asset values.

“Increased interest rates have had an impact on valuations within the real estate sleeve, especially the office sector. There is a widening difference in demand for Class A and Class B office spaces,” added Corr.

As Corr spoke about increasing allocation to its real assets’ portfolio, she also highlighted increasing focus on sustainable investment opportunities including energy transition, renewables, carbon-neutral and sustainability certified assets as a part of its Sustainable Investments 2030 plan.

“Increased interest in AI and Net Zero targets have created tailwinds for digital energy and transition assets from the infrastructure, but we haven't seen widespread distress in the real estate market, yet we are positioning ourselves to be able to take advantage of opportunities should they arise,” said Corr.

Moreover, within the real estate sleeve, the system is actively identifying energy optimization opportunities and reducing carbon intensity to generate cost savings over time.