The €10.6bn Irish National Pensions Reserve Fund has confirmed it is to make its first foray into real estate. Senior manager Adrian O’Donovan has revealed plans to allocate 4 per cent of the portfolio to a range of property investment funds, with the possibility of increasing this amount over time.
The small but significant allocation is no half-hearted endorsement of the asset class considering the pension fund’s conservative investment approach. True, it has an 80 per cent allocation to equities and 20 per cent in fixed income. But this year is the first time it has dared to venture into both small-cap stocks and corporate bonds, arguably more mainstream asset classes, to which the fund has allocated just 2 per cent apiece.
Mr O’Donovan said the property investment was aimed at reducing the pension reserve fund’s risk by diversifying its investments. “We want to spread out beyond just equities and bonds. We plan to invest through funds rather than directly in order to increase this diversification”, he said.
Across the Atlantic, the Pennsylvania State Employees’ Retirement System (Sers) is aiming to allocate $2.2bn (€1.7bn) – 8 per cent of its fund – to real estate. It is very close to this target according to Sean Sanderson, a spokesman for the $25bn scheme. He revealed that the fund has just appointed BPG Investment Partnership to run $25m. BPG is a US specialist group that invests in real estate equity funds, as opposed to investing directly in real estate.
Sers views property investment as a means to long-term returns, which it believes will be higher than bonds, but lower than equities – once again, diversification is the motivation for the investment.
Janus Capital Group is in position to take advantage of worldwide interest in diversified property investment. It invests in a range of equity real estate investment trusts (Reits) - US tax efficient commercial property products through its Californian subsidiary Bay Isle.
Performance of such products has been strong for five years. The Morgan Stanley Reit index has outpaced the S&P 500 index by 107 per cent since 1999. James Murray, senior Reits analyst at Bay Isle, recommends investors of all kinds put 10 per cent of their portfolio in property, adding investment through funds has a surprisingly low correlation with direct investment.
He conceded that Reits are vulnerable to interest rate increases, but he argued that interest rate rises can hurt all asset classes. Plus, they would signal economic prosperity, which could only boost the commercial real estate market through factors such as increases in employment.
Back in Europe, Henderson Global Investors has launched an innovative property fund, which offers institutions the chance to hold units in the vehicle in the form of both equity or bonds. The Caspar Fund’s client director Desmond Jarrett claimed that the units would be easy to sell on, bringing desirably high level of liquidity of capital markets to property investors for the first time.
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