Los Angeles pension considers new infra strategy

The Los Angeles County Employees Retirement Association is considering making new investments in infrastructure and other real assets after an advisor recommended diversifying its portfolio exposure, according to board meeting documents.

At a board of investments meeting last week, Meketa Investment Group suggested the $52.7 billion pension expand its exposure to assets including core and non-core infrastructure, treasury inflation-protected securities and natural resources – agriculture, timber, energy and mining. Investments in new strategies could “enhance the fund’s risk-adjusted returns,” Meketa wrote in a presentation to LACERA.

LACERA did not reply to a request for comment, and it’s unclear if the pension accepted Meketa’s recommendation. The advisor said next steps for this strategy would be to set initial asset allocations and refine risk targets and expected return ranges at upcoming meetings in April and May.

At the end of last year, LACERA’s portfolio was divided mainly among fixed-income assets, non-US equity and US equity, with real estate and private equity at 11.2 percent and 9.5 percent respectively.

Meketa presented to LACERA 10-year expected returns for the new asset classes it recommended based upon capital market expectations from last September. Net infrastructure returns, including both core and non-core, were projected at 6.6 percent.

According to the pension’s annual report from last June, its total portfolio returned 12.7 percent net of fees and a five-year annualised return of 9 percent.

In 2013, John McClelland, LACERA’s principal investment officer for real estate, wrote a memorandum saying infrastructure at that time was too risky and lacked reliable benchmarks to develop a dedicated strategy. Brownfield infrastructure “may present a viable option to consider once there is more proven performance and a developed marketplace,” McClelland wrote.

Since then, institutional investors have increasingly committed more to the asset class, some for the first time. Total fundraising has climbed from $39.2 billion in 2012 to $57.9 billion last year, according to Infrastructure Investor data. The asset class is seen by many as a way to gain exposure to normally low-risk investments that provide steady returns for long periods of time.

However, the increased interest has also caused some investors to press pause on new commitments. A survey conducted by Probitas Partners last year found that too much money flooding the asset class was a primary concern among investors, with 53 percent saying they would maintain current exposure and only 25 percent saying they would invest more.