New Tools Provide Greater Precision in Asset Allocations

The popularity of the Outsourced Chief Investment Officer concept is growing among pension funds, endowments, foundations, and other large pools of capital.  Increasingly these consultants are handling a number of critical functions: establishing and maintaining asset allocations to achieve a strategic mix leading to a targeted return; selecting, monitoring, and terminating money managers; and analyzing performance attribution giving insight into active returns.

Most plan sponsors expect their OCIO to maintain the plan’s asset allocation within a tight band.  While this can easily be done for most asset classes using widely available securities and tools, there is one glaring exception: private commercial real estate.

Until recently, there was no security that mirrored the overall commercial real estate market.  As such, allocations were difficult to maintain, and increasing or decreasing real estate exposure in clients’ plans were often challenging.

With the introduction of Global Index Group’s (GIG) Down/Up Equity Trust Securities (duETS), a security developed by the creator of the Russell family of equity indexes, a solution is now available.  duETS allow OCIOs to efficiently raise the levels of exposure to private commercial real estate without the cost and complexity of using gated real estate funds, the imprecision of relying on public REITS (which cover less than 5% of the market) or shorting CMBS.

Because duETS track the NCREIF NPI’s Market Value Index, OCIO’s can lock in market appreciation, based on their forecasts now for their client’s expected targets in the future. This now allows an OCIO to provide hedging overlays to clients as well offer their clients the same level of precision in real estate allocation as they get in the other asset classes.

The appeal of OCIO firms is compelling: they provide fund managers with access to investment management, exposure to new methodologies and tools as well as increased efficiency, often at a lower cost than in-house management. Now OCIOs, and other real estate investment managers, have new options for real estate allocations and hedging that increase their value even more.