The California State Teachers Retirement System (CalSTRS) is looking to increase its target allocation to real estate from 13% to 14%.
The allocation will go into effect when the pension fund’s 2016-17 fiscal year begins on 1 July.
It will be the US pension fund’s first allocation change for real estate since August 2013, when it was moved from 12% to 13%.
CalSTRS has a range of +/- 3% where it can invest additional capital in the asset class.
Its real estate portfolio was valued at $25.9bn as of the end of September last year, putting the portfolio at 13.9% of its $186.2bn of total plan assets.
The fund will work on the effective liquidation of non-control investments in the high-return portfolio, aiming to rebalance the portfolio.
Around half of the high-return portfolio is in non-control investments made under a high risk objective.
These investments are, the fund says, hurting the overall performance in the high-return portfolio.
On a net IRR basis, the high-return portfolio is achieving an 8.9% return, compared with an 18% return for the value portfolio and 12.6% for core assets.
CalSTRS will buy properties on a direct basis through separate-account managers, in joint ventures for value-add investments or via funds.
The adopted targets are 60% core and 20% value-add and higher-risk tactical investments in the US and abroad.
The pension fund said it was also looking to add leverage to its real estate portfolio given favourable interest rates and the ability to increase returns with limited risk to capital.