UNITED STATES - Arizona State Retirement System is cutting back on its follow-on commitments to existing real estate investments but still diversifying some assets to prevent ‘denominator' damage of over-allocation.

Arizona State is looking to diversify its real estate portfolio through $300m-$500m into opportunistic and international funds, so the main focus of the investments will be on commingled  funds which allow the best possible chance for increased diversification and returns, according to Gary Dokes, chief investment officer at the pension fund.

"Recently we have been making some commitments that are good examples of our strategy," he suggested, pointing in particular, to its investments in PLA Residential Fund III, AIG Asia Real Estate Partners II, Five Mile Capital Partners II and Five Arrows Realty Securities V.

These funds are all pursuing different strategies, including residential investments in Mexico, opportunistic investments in Asia, mezzanine debt and entity level transactions.

However, Arizona State is being impacted by the denominator affect and officials have told real estate managers new commitments through follow on funds will be cut by 50%.

One such example is the pension fund had originally made a $50m commitment to Five Arrows Realty Securities V but this has since been dropped to $25m, as the pension fund is concerned about its total plan assets dropping too fast, as a result of market turbulence in recent months and then it becoming over allocated to real estate.

Arizona State now has a 6% targeted allocation to real estate with a range of +/- 2%.

However, it has actually invested 2% or $550m in the asset class and has commitments amounting to 4% or a total of $1bn in real estate.