New Sources of Capital from Target Date Funds October 16, 2012 National Association of Real Estate Investment Managers Moderator: Lennine Occhino Mayer Brown Panelists: Joshua CohenLeonard KaplanLaurie Tillinghast Russell InvestmentsPrudential Real Estate InvestorsUBS Global Real Estate – US
Distribution of US Private Pension Plan Assets By Plan Type 1975 – Source: U.S. Department of Labor: Form 5500 Annual Reports
Distribution of US Private Pension Plan Contributions By Plan Type 1975 – Source: U.S. Department of Labor: Form 5500 Annual Reports
Custom Target Date Fund Opportunity Assets in C-TDF about $54bn today – Projected growth to $530bn through 2015 – $450bn + increase next 3 years Of the $3.7 trillion in TDF assets by 2020 – 37% estimated to be in customized portfolios Approaching $2 trillion in C-TDFs in next 8-10 years Sources: Celent, CaseyQuirk, Morningstar, Consultant firms 4
Fiduciary Considerations in Using Institutional Commercial Real Estate Key Considerations 5 ERISA Risk/Return Diversification ERISA 404(c) Cash Flow QDIA Prudence Standard of Care. Same as for a Defined Benefit Plan The projected risk/return of the portfolio relative to the objectives of the target date/target risk fund or investment option Lower correlations with public equities and public fixed investments The Plan must offer participants the opportunity to give investment instructions among “a broad range of investment alternatives” Liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan “applies generally accepted investment theories, is diversified so as to minimize the risk of large losses and that is designed to provide varying degrees of long-term appreciation and capital preservation through a mix of equity and fixed income exposures…,” such as balanced funds and target date funds
Sample Target Date Fund Glide Path Source: Russell Investments. For illustrative purposes only. Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. 6
Why Custom? Casey Quirk/PSCA April 2009 Survey of 397 plan sponsors. 61% use target date funds as the default. 87% use off-the-shelf target date funds. 13% use custom target-date funds. 7
Russell’s Target Date Asset Allocation (early in glide path) Process depends on client fee sensitivity and risk tolerance 100% 8 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Core Portfolio Model Portfolio Enhanced Portfolio US Large Cap Equity US Small Cap Equity International Equity Listed Real Assets Core Fixed Income Global High Yield Global Equity Emerging Equity Alternatives Private Real Estate Core Portfolio +Model Portfolio + Hypothetical portfolios shown for illustrative purposes only.
Where does a direct RE product fit in a DC Plan? Direct RE 3-10% of a Diversified, Custom Asset allocation or Real Asset fund Target Date Fund Target Risk Fund Custom Balanced Fund Real Asset Fund Diversified Inflation Fund Other Criteria: Total Plan assets equal or greater than $500M QDIA is TDF, TRF or Balanced Fund (lifecycle, lifestyle) Custom (generic name) with “open architecture” Staff with “DB-like thinking” Managed Account 9
DC Real Estate Fund: “30,000 Foot View” 10 DC RE Fund Private Real Estate Fund(s): % Liquidity Components: 0-40% (REITs and/or cash) + NAV determined by RE Manager and/or 3 rd Party Overall Fund NAV determined by custodian NAV determined by fund(s) C-TDF Record keeper determines NAV
Liquidity Management Managing cash flows and liquidity needs of TDF Managers and Plan Sponsors Factors to Consider TDF Cash Flow Rebalance methodology Events that may trigger a material change in cash flows; i.e., reenrollment, new participant enrollment, plan design changes What to ask a Real Estate Manager Are there liquidity queues to get in and/or out of private real estate? Does the manager deploy a multi- fund approach or single strategy? Utilize line of credit or back stop to guarantee liquidity 11 Plan TDF 15% to 40% of Plan Assets Real Estate 5% to 15% Allocation Credit Line 5-15% Cash/REITs 0-40% Private Direct Property %
Liquidity Versus Optimal Allocations 12 Cash/REITs 20-40% Direct Private Property 60-80% Optimal allocation to produce desired outcome in TDF Trade off between liquidity and optimal allocation What is the real liquidity risk? Liquidity Range 0% Private Direct Property 100% Publically Traded REITs
Valuation Methodologies Range of Approaches 13 Partially outsourced to 3 rd Parties Valued In-house Valued by 3 rd Parties Transparency Integrity of the internal model Frequency of change Conflicts of interest Organizational confidence in change notification process Materiality levels Frequency of change Strength of market database Organizational confidence in change notification process Access to accounting records of manager 1)Individual property appraisals 2)Appraiser review process at Fund level 3)Intra-quarter changes; capital deployed, extra- ordinary revenue/ expenses 4)Net operating income and changes thereto