Alaska Permanent Fund Corporation’s direct approach to real estate investment has been called into question after underperforming its benchmark.

Timothy Walsh, who was until recently part of the sovereign wealth fund’s investment advisory board, recommended an immediate halt to direct investments as part of a review of APFC’s $5.65bn (€5.12bn) real estate portfolio.

Walsh’s review was requested at APFC’s December board meeting in response to performance concerns at the $68.1bn fund.

APFC told IPE Real Assets that the board “elected to take no action with respect to Mr Walsh’s recommendation” and that the fund “encourages healthy debate and a ‘devil’s advocate’ posture at times” from board advisers.

Walsh, who resigned from the advisory board prior to last week’s board meeting, argued there were “limited competitive advantages in continuing direct real estate investing” and that, for it to be effective, it would require the hiring of more in-house expertise.

Rose Duran, who has been director of real estate investments at the fund since 2007, argued that the underperformance was not reason enough for the direct approach to be “abandoned”, according to minutes from the board meeting.

The underperformance has been attributed to APFC’s underweight position to multifamily and industrial sectors and its heavy exposure to retail.

An analysis by investment consultancy RCLCO Fund Advisors said: “Industrial has been the highest performing property type over the last five years, and multifamily and industrial are projected to be the highest performing property types going forward. Retail, which currently represents approximately half of APFC’s portfolio, has the lowest historical and projected returns of any real estate property type.”

Specific transactions have contributed to the underperformance, including the sale of a 50% stake in developer Simpson Housing for $1.4bn, which significantly reduced APFC’s exposure to the multifamily sector.

Others include the purchase of two UK shopping centres in Warrington and Bromley, Greater London in 2014 and 2016, respectively, through separate-account manager LaSalle Investment Management.

The investment in Golden Square shopping centre in Warrington came two years before the result of the UK’s 2016 EU referendum after which the country’s currency devalued.

“Two large APFC investments have had outsized negative impacts on the fund’s returns,” RCLCO wrote in the analysis. “One investment unperformed as a result of unfavourable changes in exchange rate caused by the announcement of Brexit [in June 2016] as well as systemic weakness in the UK shopping-centre market segment.”

According to board-meeting minutes, Duran said “the portfolio mix is completely out of whack and this is what went wrong”, adding that it “is way off on industrial and multifamily, especially following the sale of the Simpson Housing portfolio”.

The board report says: “She stated that recent performance hasn’t been good, but she does not believe that it means that the direct investment approach to investing should be abandoned.”

But Walsh has argued that a “proper direct structure requires significant hiring, compensation changes and office location expansions”.

Taylor Mammen, senior managing director at RCLCO, said the consultancy views did not “different significantly” from those expressed by Duran, but he did suggest the sale of the Simpson Housing stake was necessary because it was “a very large portfolio and the [APFC] staff is limited”.

Mammen said over-concentration of a portfolio tended to be one the main causes of underperformance in real estate portfolios. The board report said: “He stated that at risk in this portfolio would be asset concentration and manager concentration”.

In a presentation, Walsh was more direct, stating: “Having five assets making up close to half of the portfolio is too risky.”

Mammen said RCLCO’s had been searching for potential joint-venture partners and open-ended funds to increase APFC’s exposure to industrial and multifamily markets.

Walsh also recommended exploring the possibility of “contributing large single assets to pooled vehicles”, such as open-ended core real estate funds. This approach, he said in a presentation, “would almost instantly increase diversification, reduce portfolio over/underweights”.

His other recommendations were considering real estate debt funds, in which APFC currently has minimal exposure, and using public real estate investment trusts (REITs) to immediately address “portfolio under-weightings”.

Last year, APFC reclassified REITs as part of its real estate allocation where they had previously formed part of its ‘fixed income plus’ bucket.

A previous version of this article omitted the fact that the board elected to take no action with respect to Walsh’s recommendations, and that Walsh had since resigned from the investment advisory board