California State Teachers Retirement System (CalSTRS) is lowering its return requirements for riskier real estate investments.
The $181bn (€169bn) pension fund has approved changes to its real estate investment policy, including reducing target returns for value-add and opportunistic investments by 3%.
CalSTRS, advised by The Townsend Group, decided its previous targets for 9-12% for value-add and 13%-plus for opportunistic were unrealistic, added unnecessary risk and were not prudent in the current market environment.
Board meeting documents show the decision has been made at the same time that the pension fund is looking to reduce its opportunistic holdings and increase its core exposure.
CalSTRS has increased its allocation to core from 50% to 60% and lowered is opportunistic allocation from 30% to 20%. Its 20% allocation to value-add will remain the same.
It said the move would lower risk and help provide stable cash flows.
The reweighting of the portfolio is expected to happen naturally as existing opportunistic investments are either sold or turned into to core assets and transferred to the core portfolio.
The California Public Employees Retirement System (CalPERS) has also been reweighting its real estate porfolio in favour of lower-risk, core investments.
At the end of September, CalSTRS had a real estate portfolio valued at $25.3bn, according to a spokesperson, represending a 14% exposure.
The current targeted allocation for real estate is 13%, with no plans to change this allocation in the near future.