US - California Public Employees' Retirement System (CalPERS) has, or in is in the process of, sacking a number of real estate managers, according to a report from its advisers Pension Consulting Alliance (PCA).

The announcement was made by PCA via a memo to CalPERS's investment committee, in relation to the performance of the pension fund's real estate investments over the third quarter.

"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 report said.

Its real estate portfolio produced a negative total return of -30.1% during the third quarter of 2009, and a negative total return of -48.7% for the first nine months of 2009.

There has been speculation this year that BlackRock will lose its real estate investment management contract with CalPERS, because the fund manager advised the pension fund to invest $500m (€341m) into a New York apartment complex and the latter might well lose its capital in the deal.

The speculation arose after CalPERS announced it was reviewing all of its real estate managers and Victor MacFarlane of MacFarlane Partners ended a 10-year advisory relationship with the pension fund, following the pension fund's $971m investment loss in bankrupt LandSource Communities.

PCA did not reveal which managers had or were going to be fired, but said the review process had "yielded important lessons learned and is proving very valuable to the restructuring of the portfolio".

Over the past 10 years, CalPERS' real estate performance  before fees has underperformed the NCREIF benchmark, and after fees it has underperformed the inflation-adjusted real  target return of the pension fund, set at 5%.

PCA attributed this primarily to the poor performance of investments with
2006-07 vintages, and concluded: "Therefore, the short-term results continue to warrant close scrutiny."

CalPERS is currently undergoing a deleveraging process in its real estate portfolio that will address loan-to-value issues, covenant breaches and defaults.

The report said this would stabilise the portfolio and relieve the pension fund from "intense asset-level management responsibilities required by the distressed debt situations that pervade the portfolio."

PCA predicted property fundamentals and the performance of the pension fund's portfolio to deteriorate over the next 12 months and potentially longer, but advised CalPERS to consider new investments in the New Year.

"The combination of the significant underweight [position] to real estate and distressed market conditions indicate that 2010 may be an excellent time to begin looking at new acquisitions that are consistent with CalPERS' new investment policy," it said.