UNITED STATES – California Public Employees Retirement System (CalPERS) is planning to allow itself longer to rebalance its real estate portfolio towards a heavier core weighting.

According to documents, adviser Pension Consulting Alliance (PCA) supports proposals to extend "interim real estate policy limits" by two years, which as they stand require CalPERS to have at least 50% of its real estate portfolio in core investments by July 1. The core weighting currently stands at 43.4%.

The $255bn (€195bn) investor is still committed to its long-term objective of increasing the core weighting of its property portfolio to a range of 75-100%, but CalPERS believes it will benefit from delaying the start of the next "interim policy limit", which would require it to have an exposure of between 50% and 100%.

PCA believes CalPERS will benefit from the delay because it expects a greater number of large portfolio deals to come to the market over the next two years. Acquiring larger portfolios of assets should enable the institution to reach its long-term objective by 2015, although PCA recognised the "attendant risk of vintage-year concentration".

PCA attributed the inability to meet the new 50% target in time due to the execution of "new operating agreements" taking longer than expected under CalPERS's new "alignment of interests model". The pension fund is planning to hire additional real estate managers to help meet the objective during the next fiscal year.

CalPERS will also rebalance its portfolio by "selling opportunistic legacy investments at a more aggressive pace". It was recognised that such a move could see a reduction in the pension fund's overall real estate exposure in the short-term.

PCA has supported this plan on the basis that the opportunistic holdings are "not consistent with the role of real estate in the overall portfolio given their risk characteristics", giving leverage, alignment, control, governance and fees as examples.

PCA also "the management of these investments is highly specialised and time consuming".

CalPERS is on-target regarding its value-add, opportunistic and real estate investment trust (REIT) investments. They currently represent 20.4%, 36.2% and 4.9% of the real estate portfolio, respectively.

The long-term target ranges are 0-25% for value-add, 0-25% for opportunistic and 0-5% for REITs.

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