State pension fund showing improvement
By Deborah Adamson
Advertiser Staff Writer
The state public employees pension fund reported a better return on its real estate holdings in the past fiscal year and is targeting retail properties for 2004 investments as the economy continues to improve.
A report by independent adviser Callan Associates yesterday to trustees of the state Employees' Retirement System showed that the 6.89 percent total return was in line with a benchmark set by the retirement system after fees. But the return does not subtract inflation, so after accounting for it, the return would have fallen below the pension fund's target of 6 percent.
In the past five years, the fund returned 6.61 percent a year on average before inflation.
Proceeds from the fund's investments help to cover the retirement benefits for 93,000 current state and county workers and pensioners.
The pension fund has improved returns after diversifying its real estate assets away from a concentration of local properties, a task that took seven years. In the past, poor investment performers such as the Queen Ka'ahumanu Center on Maui had dragged down the retirement system's real estate portfolio.
Ronald Peyton, president and chief executive of Callan, said the fund is in good shape to weather any real estate downturns. Ninety percent of the fund's real estate holdings are in properties that are typically 85 percent occupied in "class A" locations and that have high-quality tenants, the adviser said.
"We're reaching a peak where the (real estate) market is getting frothy," he said. "While we might see a down cycle in real estate, we're not going to get hit very hard."
As of the 2003 fiscal year ended June 30, the pension fund also came within its targeted allocation range of 7 to 11 percent of its portfolio in real estate. It had $586 million, or 7.5 percent in land and development. The fund also committed another $144 million to the sector, which would bring holdings to $730 million, or 9.4 percent of the fund's $7.8 billion portfolio.
The state pension fund invests in real estate and fixed income securities to balance out the more volatile stock portion of its portfolio.
During the fiscal year, the three main managers of its real estate portfolio had a wide variety of outcomes. Heitman Capital Management posted a total return of 12.13 percent, Invesco Realty Advisors brought in 9.79 percent, while Clarion Partners eked out 3.06 percent.
Clarion had trouble with a shopping center in Del Mar, Calif., an industrial building in suburban Boston and an office building in the Chicago area.
During the year, the state pension fund fired PMRealty Advisors after key investment executives left when the parent company was trying to sell the unit. PMRealty ultimately went out of business after other clients bailed as well. Assets handled by PMRealty went to Heitman and Invesco.
Going forward, the fund's money managers will target retail properties because an improving economy usually bodes well for this type of real estate investment.
The state pension fund also adopted tighter standards for all money managers, raising requirements that could put them on a watch list for possible firing.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
