UNITED STATES - Massachusetts Pension Reserves Investment Management Board has decided to lower its allocation to real estate from 11% to 10% and double the size of its allocation to timber from 2% to 4%.
"Mass PRIM's relatively conservative approach to real estate creates return limitations relative to other private asset classes such as private equity," said Tim Schlitzer, senior investment officer for real estate and timber for Mass PRIM. "Thus, 1% was reallocated to private equity investments as a greater long-term source of potential added return."
Mass PRIM's real estate portfolio accounted for 10.9% of its total plan assets at the end of June 2009 and the value of its real estate assets was pegged at $4.09bn (€2.9bn), placing its real estate holdings within the current allocation ranges.
The pension fund believes real estate liquidity will come from REIT security sales or property sales, although the investment staff have no intention of forcing sales but instead expect to move back to their target more naturally.
In contrast, the team said it is planning to invest more assets in timber, and will allocate anything between $500m and $1bn over the course of the year to assist its inflation hedging, continued Schlitzer.
"Timberland has historically provided a stable yield, a partial inflation hedge and diversification benefits. The current natural resources allocation has provided some inflationary benefits, but it is highly correlated to equities," said Schlitzer.
It has been a while since Mass PRIM carried out a timber investment transaction, as the last was made in 2004. Moreover, the pension fund has yet to make a final decision as to how exactly it will invest the money, according to Schlitzer.
"We are still figuring this out. The current format that has worked well is externally-advised separate accounts. Mass PRIM manages the investment policy and sets manager guidelines but the investments are made at the manager's discretion," he added.
The pension fund had a timber portfolio valued at $1.21bn to the end of June 2009. The pension fund's return target for investing in timber is to exceed the NCREIF Timberland Index and/or achieve a 7.25% real return over the three- and five-year rolling return periods.