After losing 42 percent of the value of its extensive real estate portfolio during the recession, CalPERS, California's largest public pension fund has approved a formal plan to pursue a less risky investment strategy, according to an article today by Marc Lifsher in The Los Angeles Times.

Board members of the $229-billion California Public Employees' Retirement System endorsed a plan to shift away from residential properties, raw land and highly leveraged real estate investment trusts to so-called core holdings, mainly commercial office buildings, the article said.

The value of CalPERS' real estate peaked at $23.7 billion in March 2008 and plunged to $13.7 billion in June 2009 as the housing bust took its toll. Since then, CalPERS started shifting to less risky investments and last year its holdings rose to $16.5 billion as of Sept. 30.

The pension fund, the nation's largest, generated much of the decline by betting heavily on residential property, including undeveloped land. "Most notable," the article said, "was a $970-million write-down in the LandSource Communities Development partnership, which was developing a 15,000-acre tract near Santa Clarita. CalPERS also lost $500 million on an 80-building, apartment high-rise deal in New York and $100 million on an apartment complex in East Palo Alto."

"We're lowering the risk profile," said Ted Eliopoulos, CalPERS' chief real estate investment officer. "It's a gradual transformation of the existing portfolio. We're building up a base, particularly of quality real estate, over a sustained period of time."

The new goal, the article said, "is to avoid such speculation. Instead, CalPERS plans to concentrate holdings so that at least 75 percent of the real estate portfolio, currently at about $15 billion, is generating a less-volatile, stable cash yield that can serve as a partial hedge against inflation, Eliopoulos said. About 15% of the remaining capital would be earmarked for such investments as development projects and distressed properties in the U.S., while about 10 percent would be invested in growth and income opportunities overseas. All three categories are expected to return an estimated 7 percent a year, slightly higher than the fund's historic 6.5 percent rate of return on its real estate investments."

CalPERS' formal switch in investment criteria, which has been underway for the last year, "is a milestone event," said Chief Deputy Treasurer Steve Coony, who added that the fund must put its money into investments that provide real value rather than rely on the kinds of exotic financial products that collapsed when the real estate bubble burst in 2007 and 2008.

The process of changing CalPERS' investment mix is expected to take three to five years. "We are not going to sell at fire-sale prices," Eliopoulos said.

"We are recognizing the key role of real estate in a defined-benefit plan," said Tony Oliveira, vice chairman of the investment committee, in an article by James Nash yesterday at Bloomberg News. Mr. Oliveira said that compared with slumps that affect residential property, declines in commercial real-estate values tend to be less pronounced. "They're not busts, they're adjustments," he said at a board meeting in Sacramento.

The committee's vote on the issue was unanimous.

Property accounted for $16.6 billion, or 7.3 percent, of Calpers's assets as of the end of December, according to the fund's website. The Sacramento-based pension plan provides retirement benefits to about 1.6 million people.