Los Angeles County Employees Retirement Association (LACERA) is planning to no longer give discretion to its value-add real estate separate accounts.

The pension fund’s investment team has proposed a number of changes to its real estate strategy after its non-core portfolio was found to have underperformed over the past 10 years.

A board meeting report shows that the real estate portfolio returned 3% over the period, below its investments in US equities (7.4%) and fixed income (5.5%). The underperformance was attributed mainly to its non-core real estate portfolio.

LACERA said some value-add investments had “performed well”, but “overall they have failed to achieve a premium over core investments”.

It recommended evaluating manager performance with a view to modifying or terminating mandates as needed.

“Continued retention should be predicated on performance,” the report said. “Some separate account managers have generated strong performance while others have not. Under-performing managers should be terminated or have mandates restricted to only areas of proven expertise.”

The report highlighted the high concentration of the its value-add separate accounts, with just three investments accounting for 80% of the value. 

The investment team has recommended investing more in commingled value-add funds in the future, to provide greater diversification, and to suspend separate-account managers from making future value-added deals without approval.

It has also proposed creating performance targets for individual managers to better assess performance.

“The managers have not demonstrated the ability to execute value-added strategies successfully,” the report said.

The pension fund is also considering investing in more core open-ended property funds to give it greater diversification.

Its core £4.2bn (€3.4bn) portfolio includes 77 assets, a fraction of the 2,510 properties owned by open-ended funds tracked by the $181bn ODCE index.

The pension fund said it could look to trade some of its separate-account assets in return for position in funds, potentially enabling it to avoid long entry queues.