Texas Employees' Retirement System's investment in a pan-European portfolio may be a sign - but it's a weak one, says Shayla Walmsley.

When the Texas Employees' Retirement System (ERS) announced that it had hired Aberdeen to manage an €85m pan-European multi-manager portfolio, some market watchers took it as a US vote of confidence in markets whose inhabitants assumed they were, to put it mildly, battered.

It turns out the ERS is not alone. AMP Capital this week announced it had secured €37m from an unidentified US pension-fund investor for the €326m fourth close of its global infrastructure debt fund. "Broadly speaking, US pension funds have a different mindset - a different starting point," says Andrew Jones, managing director of infrastructure debt at AMP Capital. "When US pension schemes think of allocating, they are more likely to start with a private equity mindset, focused on higher risk and return."

The Texas ERS, which has allocated 3.89% of its $21.7bn (€16.1bn) portfolio to real estate, has allocated roughly the same amount to private equity. But Jones has seen a change in that private equity mindset over the past six months. In educational-style meetings, relatively low but consistent yield has gained more traction as an idea among investors previously focused on capital growth.

Hence the multi-manager approach - rather than, say, private equity. Despite its low profile in the past couple of years, Aberdeen head of property multi-manager Jon Lekander says there had been an "awakening" in the multi-manager market over the last 12-18 months. "If you think about it, the recovery of the multi-manager market is not so far off from the recovery of the direct market," he says. "The multi-manager recovery has reflected the recovery of property - but it takes longer to come about."

For a number of US investors, this will be their first step in alternatives outside the US market. "It all depends on whether the pension scheme has the time and money to invest on its own account," says Lekander. "If you're not located in the market you want to invest in, and with staff in the region, the investment might be best addressed by a multi-manager solution."

Although the Texas ERS's real estate director, Robert Sessa, cites returns from European volatility as a reason to invest, Lekander divides Europe into either side of the Alps, and it is the northern half he is interested in. The AMP fund invests primarily in Western European assets, as well as assets in the US and Australia. In other words, both managers are keen to minimise exposure to European macro volatility.

It's just as well. A continental report published by Aberdeen this week identifies core northern European markets as the place to be. Even though it sees longer-term opportunities in Spain and Ireland, especially at currently discounted values, it also predicts a dip again in the next year in capital values and secondary property in southern Europe.

Risk is not what the US pension-fund real estate investors are after. Rather, via their European fund investments, they will compete with their European counterparts for prime assets in core European markets. Yet other US pension funds are simply waiting. "They're positioned to be ready when the European market turns," says Lekander. "They're not wanting to invest today but to get a better grip on what's happening."
Contrast the Texas ERS with the view just on the road, from the $101bn Teachers' Retirement System of Texas. In a TRS trustees' meeting last week at which the scheme announced the first partnership of its kind with private equity specialist Apollo Management, KKR managing director Henry McVey offered his largely negative prognosis for the indebted European market.

And Simon Durkin, head of research at RREEF, who in December co-authored a report on opportunistic European real estate investment, pointed out this week that risk - in Europe as elsewhere - is a dynamic and relative concept. As an example, he cited risks associated with real estate in some European countries changing to reflect changes in pricing of sovereign risk.

But it is not the sovereign debt per se that worries McVey. As he points out, Japan accumulated eye-watering debt, but it was largely held domestically. "We can't just look at debt to GDP in isolation," he says. "Countries can typically run with a high debt-to-GDP ratio for long periods of time with little consequence. So we also need to look at debt held abroad, the primary/surplus deficit and growth [and] competitiveness."

He adds: "To get out of a high debt situation, we believe you need at least one of three things - currency devaluation, bond default or wage deflation - in the near term. Ultimately, though, you need nominal growth over time to grow your way out."

Given little evidence of likely nominal growth in European markets, he concludes: "There is no sign of the required change yet."