CalPERS to Terminate Managers over Real Estate Losses

December 9, 2009 ( - The California Public Employees' Retirement System (CalPERS) is moving to terminate some of its investment managers as a result of large losses to its real estate investments.

The L.A. Times reports that the value of the pension fund’s real estate holdings fell 30% in the quarter that ended September 30 compared with the previous quarter, according to a consultant for system. Year over year, it dropped 48.7%.

A memo from the fund’s adviser, Pension Consulting Alliance Inc. of Encino, said the system is reviewing its relationships with its individual investments and with its individual investment managers. “A number of managers have been or are in the process of being terminated as their performance and judgment proved to be well below expectations,” the memo said, according to the Times.

CalPERS fired its real estate adviser, McFarlane Partners, in October.

The news report said losses on residential and commercial properties reduced the value of CalPERS’ real estate portfolio to $13.6 billion, eliminating six years’ worth of gains. Real estate investments have underperformed all the fund’s benchmarks. The 4.4% average yearly return for 10 years was substantially below a benchmark based on other investors’ results of 8.9%, Pension Consulting Alliance said.

The consulting firm predicted the outlook to worsen over the next year.

CalPERS’ real estate investments were hit hard in June 2008 by a $1-billion writeoff for the bankrupt Newhall Ranch residential project north of Los Angeles, according to the Times. An additional $500 million put into a partnership in the Stuyvesant Town-Peter Cooper Village apartment complex in New York is threatened by a collapse of the residential property market and the prospect of bankruptcy by CalPERS’ partners, Blackrock Inc. and Tishman Speyer Properties (see Pension-Backed NYC Investment could be in Foreclosure by 2010).

CalPERS’ total assets, worth $198 billion on September 30, rose 8.6% for the quarter, but were down 6.9% for the year. The fund lost 2.9% on an annualized basis for the last three years but earned an average of 3.6% over five years and 3.7% over 10 years, CalPERS said.

The pension fund, which provides retirement benefits for 1.6 million former state and local government workers, says it needs an average return of 7.75% a year to meet its long-term obligations.