Case Study: Investment Strategy for a U.S. Public Pension Fund

Our work with a U.S. Public Pension Fund (“Fund”) illustrates our ability to apply an evidence-based, strategic approach that is grounded in an understanding of project-level economics to reorient a public pension fund’s real estate portfolio on a path toward real growth and income generation. In commencing our work with the Fund, RCLCO drafted a groundbreaking implementation and pacing plan that outlined an investment strategy to achieve its goals and guided a rigorous manager selection effort to commit more than $1 billion in equity to seven strategic managers, which has since grown to over $3 billion in equity commitments with 15 managers. RCLCO re-visits its pacing plan at least annually in order to ensure that the in-place strategy is correct and add new investment strategies when necessary.

The pacing plan and investment strategy was developed after a robust portfolio structure analysis to understand the client’s overall objectives and the expected role of real estate in the cross asset class context, including needs for cash flows versus returns, liquidity, volatility and return expectations, and such. RCLCO then reviewed policy limitations to understand and refine policies to match the overall performance needs. Allocation and pacing plans that incorporate the client’s current portfolio were then developed that built upon the goals and policies that have been set to maximize performance for that client and address diversification factors such as style, economic and sovereign risk, property type (lease structure and inflation), capital structure and venture structure (liquidity and control). We thus do not favor a particular strategy or property type, but rather strive to develop a plan that meets each client’s needs. By using RCLCO analyses, which include both top-down and bottom-up models, we have been able to develop and implement actionable plans for clients to implement structures that improve their portfolio expected risk adjusted returns, liquidity, and control structures.

This approach has allowed the Fund to have more control over the portfolio, earn sufficient cash flow to benefit plan beneficiaries, and reverse its long history of underperforming the benchmark. After partnering with RCLCO in 2013 to effectively manage the Fund’s restructured real estate investing program, the portfolio’s return has far outpaced its benchmark by approximately 200 bps based on both a 3 year and 5 year horizon.

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