Indirect Investments in Real Estate

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Indirect Investments in Real Estate

• Michael Taylor
• Chief Executive
• London Pensions Fund Authority

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Agenda

• LPFA Fund
• Alternative Investments - Current Strategy
• History of Property Investment at LPFA
• Current Thinking
• Designing the Real Estate mandate

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LPFA Fund Structure

• Active Fund 84 funded
• Immature
• Cash positive
• Reasonable appetite for risk
• 220 participating employers
• Pensioner Fund 85 funded
• Mature
• Cash negative
• Reduced appetite for risk
• No employers

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Active Fund Liability Profile
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Active Fund Strategy

• Maintain returns while reducing
• Risk
• Volatility
• Long term time horizon

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Active Fund Investment Strategy

• Global equity strategy
• Supplement with Absolute Return Targets
• Reinforce with Alternatives
• Underpin with Currency Hedge

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Active Fund Investment Strategy

• Sources of out-performance
• Global Equity
• MSCI indices 1 to 3
• Absolute Return
• RPI 5 to 6
• Alternatives
• RPI 5

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Alternatives Investment Strategy

• Property 150m
• Infrastructure / PFI 25m
• Private Equity 130m
• Clean/Tech Venture 50m
• Commodity Timber 10m

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History of Property Investment at LPFA
Sell down
Global Real Estate Indirect Funds
Direct property
UK PUTs
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History of Property Investment at LPFA

• 1988 2003
• Direct property
• Target Allocation 14
• 1994 2000
• Selling down
• 2000 2003
• Zero Property
• 2004 2006
• UK PUTs
• Target Allocation 7
• 2006
• Sell down of UK PUTs to 5 allocation
• 2007
• Global Real Estate Indirect Funds
• Target Allocation 7

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Current Thinking

• UK property potentially overvalued
• Better value in overseas property
• Desire for active management
• Meets returns objective
• Acts as diversifier to reduce volatility

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Designing the Real Estate Mandate

• Risk
• Universe
• Benchmark
• Responsible Investment
• Selection Criteria

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Risk Issues

• No tracking error type targets
• Manage risk by diversification of
• Manager
• Fund
• Property type
• Geography

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Investment Types Permitted

• Indirect Funds
• PUTs
• Investment Trusts (REITS)
• Quoted property companies
• Infrastructure Funds
• Property derivatives
• ETFs

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Universe

• UK
• European
• Other developed World
• Global including Emerging markets

Freedom to allocate by region within agreed
tolerance levels
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Benchmark Options

• Bespoke property benchmark plus 1 or 2 X
• Absolute return RPI plus 4 or 5 v
• on rolling 3 5 year basis

Returns in local currency global currency hedge
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Types of property permitted

• Some or all of
• Retail
• Industrial
• Office
• Residential
• Infrastructure

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Other issues

• Gearing permitted (debt to value)
• in range 0 75
• Income to be reinvested
• Fees
• Performance related

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Transition

• Incorporation of existing PUTs at Managers
  discretion

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Responsible Investment

• Engagement strategy
• Reducing energy use
• Reducing carbon emissions from buildings

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Selection Criteria

• Confidence in
• Strategy
• People
• Systems
• Business
• Expected returns
• Fees
• Responsible Investment issues

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Questions

• ?