Anthony Breault, senior portfolio manager at the State of Oregon Treasury, explains how he invests for the long term in real estate, the challenges of redeploying capital in rising markets, and how JVs and open-ended funds are helping the pension achieve those goals.
As institutional investors look to become more dynamic with their asset-allocation strategies, the State of Oregon Treasury maintains its emphasis on long-duration strategies in real estate—and sees joint ventures and open-ended funds as a means of achieving that goal.
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Anthony Breault, State of Oregon Treasury
“Reinvestment risk is my single greatest concern,” says Anthony Breault, real estate investment officer for the Oregon Public Employees’ Retirement Fund, discussing the challenges of keeping money deployed in a market where manager relationships are typically built around finite fund-life terms.
It’s an investment hurdle that Breault eloquently refers to as “timeline angst,” and something his team has been trying to overcome with the increased use of joint ventures and open-ended funds while at the same time maximizing risk-adjusted returns for the plan.
To fully appreciate the challenges Breault and his staff face, PrivcapRE speaks to Breault about Oregon’s $8B real estate portfolio. The team collaborates with consultants to recommend diversified investments that target 30 percent core real estate strategies, 30 percent opportunistic, 20 percent value-add, and 20 percent public REIT investments. Additionally, the total portfolio has a tactical allocation separate from real estate where shorter-term or “non-sustainable” opportunities, such as public-private investment programs and similar opportunistic plays, can be pursued.
Within the real estate portfolio, Breault’s team employs “large enough” allocation bandwidth that allows it to respond more dynamically to market conditions by going overweight or underweight within the pre-specified risk buckets.
“We have bandwidths that allow us to tilt our exposures,” says Breault. “For example, in our opportunistic or core portfolios, we have a 30 percent target, and we can go plus or minus 10 percent based on market conditions. This gives us a lot of leeway.”
For Oregon, having the latitude provided by such bandwidth is critical to maintaining valuable long-term positions in the face of a rising market, rather than being forced into selling in order to rebalance rigid asset-allocation buckets. “It’s a continual process and not that fluid,” says Breault. “It takes too long to shift the portfolio, so we are making micro-movements every step of the way. It takes time to get money out to the market.”
Given such a strategy, Oregon is increasingly looking beyond traditional closed-ended fund investments and, over the past three years, has given a growing role to joint ventures.
“With closed-ended funds managers, with a finite fund life, their underwriting standards can be limited to a hold period that does not match the specific investment opportunity,” says Breault. “This can hamper the needed flexibility for achieving the best risk-adjusted returns for the real estate asset class. With our closed-ended funds, we often find large portions of our portfolios selling at less than maximum value due to a termination date that doesn’t match with the market cycle.”
Breault says he ultimately wants “less of this timeline angst” and greater “simplicity” to create longer-duration structures “that provide the management team the needed flexibility to do the right thing.”
The evergreen nature of joint ventures is therefore appealing, Breault says, offering “tremendous flexibility without a looming date to trigger a sale.”
“[JV] vehicles have the ability to naturally outperform, on a risk-adjusted basis, by achieving greater consistency in long–term returns without complete reliance on market timing,” says Breault. Fee efficiencies and transparency also add to the appeal of JVs. For similar reasons, Breault believes the open-ended fund structure also provides an improved alignment for the real estate asset class.
While the liquidity function of open-ended funds may be more perception than reality, Oregon’s team is also considering future investments in these structures to take advantage of the evergreen design. For a long-term investor that has a need to be “always in the market,” open-ended funds help minimize the constant frictional trading costs created by the closed-end model, Breault says. “However, there are limits to the open-end fund universe,” he adds. “Investors don’t have much of a choice in the opportunistic market, which only provides closed-ended products.”
Describing what Oregon looks for in managers, Breault says a lean staffing model creates a preference for scaling capital with existing relationships. The Oregon real estate team also focuses on “structuring investments with managers that have broad enough mandates and that can look out at the bigger universe so [we] aren’t continually sourcing.”
While Oregon’s portfolio primarily consists of larger, more experienced managers, the investment team is continuously looking for and considering managers with between $300M to $1B of assets under management who can execute on niche or more tactical strategies. “This is the next generation of managers we can grow with over the years,” says Breault. “Our first investments with many of our existing larger managers were back when they were smaller platforms.”
Overall, a blended portfolio of JVs, open-ended funds, and a selective focus on commingled, closed-ended funds are proving to be the panacea for Oregon’s long-duration investment goals.
As Breault explains: “For [us], JVs provide the scalability and real-time visibility to keep our fingers on the pulse of the real estate markets, and from a structuring point of view, we can improve our buy-side discipline and alignment by removing much of the timeline angst out of incentives to deploy capital.”
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