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CalPERS axing investment managers over real estate losses

The value of the state pension fund's real estate holdings has fallen 48.7% in a year.

December 09, 2009|By Marc Lifsher

Reporting from Sacramento — The value of real estate investments held by the nation's largest public pension fund has plummeted, and the California Public Employees' Retirement System is moving to terminate some of its investment managers as a result, new documents show.


FOR THE RECORD:
CalPERS investments: An article in Business on Wednesday about real estate investments by the California Public Employees' Retirement System said the value of those investments dropped 30% in the quarter ending Sept. 30. The losses occurred in the previous quarter, which ended June 30. The article also said that an investment in the Stuyvesant Town-Peter Cooper Village apartment complex in New York was threatened by a collapse of the residential property market and by the prospect of bankruptcy by CalPERS' partners in the venture, Blackrock Inc. and Tishman Speyer Properties. Blackrock Inc. and Tishman Speyer Properties are not facing bankruptcy. —

The value of the huge pension fund's real estate holdings fell 30% in the quarter that ended Sept. 30 compared with the previous quarter, a consultant for the California Public Employees' Retirement System reported Tuesday. Year over year, it dropped 48.7%.

As a result, the $200-billion pension fund is reviewing its relationships with its individual investments and with its individual investment managers, said a memo from the fund's advisors, Pension Consulting Alliance Inc. of Encino.

"A number of managers have been or are in the process of being terminated as their performance and judgment proved to be well below expectations," the memo said.

In October, CalPERS fired its real estate advisor, McFarlane Partners.

The memo was included in materials sent to CalPERS board members and made public on the Internet ahead of an upcoming meeting Monday of the investment committee.

CalPERS' handling of its real estate investments is an "abomination," said Stuart A. Gabriel, director of the Ziman Center for Real Estate at UCLA's Anderson School of Management. "It's hard to know what kind of Kool-Aid they were drinking, but their investments were ill-timed and their due diligence was inadequate and insufficient in retrospect."

Losses on residential and commercial properties reduced the value of CalPERS' real estate portfolio to $13.6 billion, eliminating six years' worth of gains. Real estate investments have underperformed all the fund's benchmarks.

The 4.4% average yearly return for 10 years was substantially below a benchmark based on other investors' results of 8.9%, Pension Consulting Alliance said.

The outlook is expected to worsen over the next year, the consulting firm predicted.

CalPERS' real estate investments were hit hard in June 2008 by a $1-billion write-off for the bankrupt Newhall Ranch residential project north of Los Angeles.

An additional $500 million put into a partnership in the Stuyvesant Town-Peter Cooper Village apartment complex in New York is threatened by a collapse of the residential property market and the prospect of bankruptcy by CalPERS' partners, Blackrock Inc. and Tishman Speyer Properties.

CalPERS is one of many institutional investors burned in the real estate meltdown, spokesman Brad Pacheco said. "We are repositioning our portfolio for long-term growth, including reducing leverage, risk and future relationships with our real estate partners," he said.

CalPERS' real estate suffered far more than the giant pension fund's overall holdings. Total assets, worth $198 billion on Sept. 30, rose 8.6% for the quarter but were down 6.9% for the year ending Sept. 30. The fund lost 2.9% on an annualized basis for the last three years but earned an average of 3.6% over five years and 3.7% over 10 years, CalPERS said.

The pension fund, which provides retirement benefits for 1.6 million former state and local workers, says it needs an average return of 7.75% a year to meet its long-term obligations.

CalPERS' recent losses, which were fueled by the recession, have raised questions about the health and management of the fund.

Those concerns have been stoked by allegations of influence peddling by politically connected sales intermediaries and outside investment managers at the agency.

marc.lifsher@latimes.com

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