08/12/2009

CalSTRS to Step Up Oversight of Holdings

California State Teachers plans to take aggressive steps in the coming months to shore up its $13 billion real estate portfolio, whose value has plunged 43% since last summer.

Under a series of measures expected to be formally approved tomorrow, the $118.8 billion pension system will adopt a more hands-on approach. It will work more closely with investment managers and joint-venture partners to work out troubled properties. It will also consider dropping some investment managers and assuming the oversight of distressed investments itself.

CalSTRS, the nation's No. 2 public pension system, also will push for fee concessions from fund operators and operating partners, and could reduce its use of consultants to cut expenses. And it will seek to deleverage its portfolio and renegotiate the terms of mortgages on struggling properties.

The initiative, part of a broader business plan aimed at addressing the system's troubled investments, follows similar moves by Calpers, the largest U.S. pension system, which has also suffered heavy real estate losses. Calpers has said it will increase cash reserves in order to pay off maturing loans and plow more equity into struggling properties.

CalSTRS has hired five staffers over the past year to improve its ability to manage its portfolio. It now has 15 employees devoted to real estate and could add another recruit over the next year.

The pension system is asking its consultants to work with staff in "reviewing, analyzing and managing the most immediate challenges confronting the existing portfolio," according to the business plan. While its appetite for new investments is limited, it remains open to "the most compelling market opportunities," including distressed equity or debt plays.

The pension system's real estate holdings equal about 11% of total assets. Its long-term allocation target is 15%.

CalSTRS' real estate holdings had an average 17% annual return over the 10 years ending in June 2008 - tops for the pension system's asset classes. But the portfolio's 43% drop in net asset value from July 2008 through this June was by far the worst performance of any sector during that period.

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