Sonoma County Employees Moves to Hire JP Morgan for Core Investment
Submitted June 27, 2010, 9:35 PM
The JP Morgan Strategic Property Fund, a top performer in the real estate investment world, is so popular with pension funds these days that a line of $1.2 billion is waiting to get in. The Sonoma County Employees’ Retirement Association is the latest to put itself in the queue.
The pension fund is willing to wait because the Strategic Property Fund has done so well with the core, low-risk commercial real estate in which it invests. The commingled fund is a top quartile performer for the last three-, five-, seven- and 10-year periods, according to The Townsend Group, the Cleveland-based real estate investment advisor. The fund’s total gross returns are -7.6 percent for three years, 2.8 percent for five years, 5.2 percent for seven years and 6.3 percent for 10 years. The total gross returns for its peer group are -9.8 percent for three years, 0.7 percent for five years, 3.6 percent for seven years and 5.1 percent for 10 years.
Sonoma County Employees has made an initial allocation of $25 million into the Strategic Property Fund. The actual final amount could be changed when the final structure of the overall real estate allocation is determined, said Gary Bei, retirement administrator for the pension fund, in an email message. The commitment was approved based on the recommendation of the investment staff of the pension fund and by Ennis Knupp & Associates, the pension fund’s Chicago-based investment consultant. The commitment will not be called by JP Morgan until December.
There were two finalists that Sonoma County Employees considered in its search for core, open-ended commingled fund managers. The other was Dallas-based INVESCO Real Estate for its INVESCO Core Real Estate Fund. There are a total of 16 core open-ended commingled funds in the marketplace. According to industry sources, the amount that the pension fund wants to invest over the long term in a core, open-ended investment strategy is between $40 million and $80 million.
The Strategic Property Fund has been in existence since June 2000. The commingled fund has total net assets valued at $9.7 billion through the end of 2009 and 145 investments. These are divided with 41 percent in offices, 28 percent in retail, 18 percent in apartments, 13 percent in industrial properties and less than one percent in other property types.
The Townsend report listed some pros and cons of the Strategic Property Fund. On the good side it stated that the commingled fund owns a portfolio of large, high-quality and well-leased assets in major markets, which the consultant believes will recover faster than lower-quality and secondary-market properties. Another plus is that the commingled fund doesn’t have major value-add exposure.
The Townsend report had some negative comments, however. The Strategic Property Fund has a higher-than-average cash reserve, 7.4 percent of the total net asset value at the end of 2009. This hoard will need to be invested if JP Morgan wants to achieve its targeted cash-reserve position of 1 percent to 3 percent. Achieving this threshold could be a problem as there isn’t a great deal of core product changing hands now and no indication when this will change.
The other downside from the consultant’s perspective is that the commingled fund is overweighted in office buildings. Townsend is of the belief that office buildings will underperform due to weak fundamentals with a projected recovery in 2012.
Sonoma County Employees’ has 8,200 members. The total plan assets for the pension fund are $1.34 billion. Through the end of 2009, it had invested $137.6 million in real estate or 10.3 percent of its total plan assets. The targeted allocation for real estate is 13 percent.
