Alternatives, Asset Allocation, Consultants, Endowments/Foundations, Institutional Investors, Pension Funds, Private Equity

Three Institutional Investors Share Their Real-Assets Strategies

A majority of 224 institutional clients (58%) surveyed by asset management behemoth BlackRock earlier in the year, for its 2018 Global Real Assets Outlook, said they intend to increase their real-assets allocations this year, following a record fundraising year for the class in 2017. Also, closed-end private real estate funds and unlisted infrastructure funds collectively raised $194 billion from investors in 2017, up slightly from 2016, when they raised $193bn collectively. That it turn is up from $187bn raised in 2015, according to a spokesperson for Preqin, a private equity research firm. With these findings in mind, Institutional Allocator’s Kaitlyn Mitchell spoke with three public funds recently (one small, one medium and one large) that shared with her their rationale and strategy regarding their current and future allocations to the real-assets class.

Employees’ Retirement System of Rhode Island

Over the past three years, the $8 billion Employees’ Retirement System of Rhode Island (ERSRI) has seen positive returns from its private equity real estate and private infrastructure investments. “Over the past 12 months, non-core real estate returned 27% and opportunistic private credit returned 19.05% for the fund,” said Evan England, director of communications for ERSRI. “Both private equity and real estate are consistently among the top-performing asset classes net of all fees and expenses, regularly beating public equities across all asset classes.”

Both private equity and real estate are consistently among the top-performing asset classes net of all fees and expenses, regularly beating public equities across all asset classes.

The fund’s last asset allocation review, in September 2017, found that ERSRI was underweight compared to its peers in private equity, so it has increased its target allocation to the class over the next five years from 7% to 12%, a spokesperson confirmed. From June 2014 until June 2017, ERSRI saw an 8.49% annualized return on private equity investments and an 11.18% return on real estate investments. For the fiscal year ending June 30, 2018, the fund saw a 12.48% return on privately listed infrastructure investments.

Alaska Permanent Fund Corporation  

The Alaska Permanent Fund Corporation (APFC), with assets under management totaling nearly $65 billion, is in the process of gradually increasing its real-assets allocation. “For many years APFC has had a relatively large commitment to real assets, and we are focused on growing our allocation to real assets, over the next several years,” said Marcus Frampton, APFC’s acting CIO.  “Specifically, our current 18% target allocation to real assets is targeted to grow to 22% of the fund by FY 2022. Within a longer-term, multi-year allocation plan, individual acquisition and disposition decisions can cause our exposure to differ from our target. Currently, due to some recent real estate dispositions, we are under our target weight for real assets. However, on a longer-term basis we are committed to prudently and carefully adding to our portfolio over time,” Framton said.

Marcus Frampton, APFC’s acting CIO

APFC’s total fund return gained 10.74% in fiscal year 2018, which ended June 30, 2018. The unaudited value of the fund is up $5.1 billion since the start of FY18. Real estate assets total $4 billion and provide a consistent source of income and inflation protection for the fund. The portfolio is composed primarily of modestly leveraged institutional-quality direct holdings that delivered a return to the fund of 6.99% in FY18, adding to its stable, long-term performance over three- and five-year periods of 9.20% and 9.99%, respectively.

Minnesota State Board of Investments

On July 10, Active LPs reported that the $93.5 billion Minnesota State Board of Investments (SBI) saw a bigger return from real assets—a lower-risk investment class—than from other strategies, including private credit and private equity. As recently as March 31, the fund’s real assets allocation generated returns of 15.81%, compared to 12.49% from private equity, 13.05% from private credit and 3.6% from resources, according to the combined funds’ asset class performance summary published in the first quarter. The real-assets portfolio includes both core and non-core investments. The fund saw a lower return of 7.91% from real estate, for a total average of 12.50% internal rate of return from all private market investments.

A consultant’s take

Radhika Cobb, Hamilton Lane

“As various real-asset investment strategies have become more institutionally available and accepted, many limited partnerships (LPs) have taken note of the benefits of having diversified real assets in a portfolio, which contributes to broader portfolio goals, through both attractive total return and current yield generation,” said Radhika Cobb, a v.p., real assets investments at Hamilton Lane, whose assets under management (AUM) is approximately $57 billion, with a combined AUM and AUA of approximately $471 billion. “The immediate cash flow provided by many real-assets strategies has proven to be particularly beneficial, and in some cases has acted as a complement to more total-return-driven strategies. Real assets can provide inflation protection and reduce overall volatility.” (See related IA story here.)

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