By Muskan Arora
The $31bn Los Angeles Fire and Police
Pensions approved reducing allocation to its REITs, while expanding the target
allocation for its real estate portfolio.
LAFPP, alongside consultant RVK, has reduced
the target allocation for REITs from 3% to 1.5% and used it to fuel the increase
in its real estate sleeve from 7% to 8.5%.
The system allocates 14.5% to its real
assets portfolio against a target of 16.4%, as of March 31.
This change would allow the system to “capitalize
on attractive expected returns in the private real estate market while reducing
volatility and correlation with public equities”, as stated in the meeting
materials.
Within core real estate, the consultant will
target office, retail, multifamily and industrial sectors. Within non-core-
value add and opportunistic are two strategies eyed by the system.
Following the approval, the system will now
include an annual increase in the management fees of approximately $14.9
million. This includes an increase for RE feed of approximately $12 million.
The system also approved liquidation of 2% commodities
and reallocating to its infrastructure sleeve, a newly created portfolio.
The consultant suggests that “the current
commodities stock exposure does not align with the initial investment thesis of
commodities being an inflation hedge.”
Allocations to infrastructure offer a significant
diversification benefit, downside protection and income generation. The new
allocation further “exhibits higher expected returns and better direct
inflation mitigation than commodities”.
However, RVK also highlighted open ended structures of funds, potential lower return than some alternative strategies, regulatory and political risks among others.
