New Sources of Capital from
Target Date Funds
Moderator:
Lennine Occhino
Mayer Brown
Panelists:
Joshua Cohen
Leonard Kaplan
Laurie Tillinghast
Russell Investments Prudential Real Estate Investors UBS Global Real Estate – US
October 16, 2012
National Association of Real Estate Investment Managers
Distribution of US Private Pension Plan Assets
By Plan Type 1975 – 2009
Source: U.S. Department of Labor: Form 5500 Annual Reports
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Distribution of US Private Pension Plan Contributions
By Plan Type 1975 – 2009
Source: U.S. Department of Labor: Form 5500 Annual Reports
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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
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Fiduciary Considerations in Using Institutional
Commercial Real Estate
Key Considerations
ERISA
Risk/Return
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
Diversification
Lower correlations with public equities and public fixed investments
ERISA 404(c)
The Plan must offer participants the opportunity to give investment
instructions among “a broad range of investment alternatives”
Cash Flow
Liquidity and current return of the portfolio relative to the anticipated cash
flow requirements of the plan
QDIA
“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
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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.
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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.
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Russell’s Target Date Asset Allocation (early in glide path)
Process depends on client fee sensitivity and risk tolerance
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Core
Portfolio
Model
Portfolio
US Large Cap Equity
US Small Cap Equity
International Equity
Listed Real Assets
Core Fixed Income
Core Portfolio +
Emerging Equity
Global Equity
Global High Yield
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Enhanced
Portfolio
Model Portfolio +
Private Real Estate
Alternatives
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
Custom
Target
Date Fund Risk Fund Balanced
Fund
Real Asset Diversified
Managed
Fund
Inflation Fund Account
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”
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DC Real Estate Fund: “30,000 Foot View”
Record keeper
determines NAV
C-TDF
DC RE Fund
NAV determined by
RE Manager and/or
3rd Party
Private Real Estate
Fund(s): 60-100%
Overall Fund NAV
determined by custodian
NAV determined by fund(s)
+
10
Liquidity
Components: 0-40%
(REITs and/or cash)
Liquidity Management
Managing cash flows and liquidity needs of TDF Managers and Plan Sponsors
Plan
TDF
Real Estate
15% to 40%
of Plan Assets
5% to 15%
Allocation
Cash/REITs
0-40%
Private Direct
Property
60-100%
Credit Line
5-15%
Factors to Consider
What to ask a Real Estate
Manager
• TDF Cash Flow
• Rebalance methodology
• Events that may trigger a material
change in cash flows; i.e.,
reenrollment, new participant
enrollment, plan design changes
• Are there liquidity queues to get in
and/or out of private real estate?
• Does the manager deploy a multifund approach or single strategy?
• Utilize line of credit or back stop to
guarantee liquidity
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Liquidity Versus Optimal Allocations
Liquidity Range
0%
100%
Publically
Traded REITs
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?
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Private Direct
Property
Valuation Methodologies
Range of Approaches
Valued
In-house
• Transparency
• Integrity of the internal
model
• Frequency of change
• Conflicts of interest
• Organizational
confidence in change
notification process
Partially outsourced to 3rd Parties
1) Individual property
appraisals
2) Appraiser review process at
Fund level
3) Intra-quarter changes;
capital deployed, extraordinary revenue/
expenses
4) Net operating income and
changes thereto
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Valued
by 3rd
Parties
• Materiality levels
• Frequency of change
• Strength of market
database
• Organizational
confidence in change
notification process
• Access to accounting
records of manager