Olivette pension board lowers real estate target to 5% and directs reallocations, manager search

Olivette City pension board members voted unanimously to lower the plan's core real estate target to 5% and to reallocate the difference, directing their investment adviser to implement redemptions and bring options back to the board.

The board approved a motion to reduce the core real estate allocation to 5% with bands at 5% on either side, and then, after further discussion, approved an amended motion directing Marquette to reallocate the 5% removed from real estate so that 2.5 percentage points would be added to private equity and 2.5 percentage points to U.S. large-cap equities. The board also authorized Marquette to pursue additional redemptions from Principal US Property to reach the 5% level and commissioned a manager search to replace the plan's current high-yield holding.

Why it matters: the board's changes shift the plan's risk profile modestly toward less real estate exposure and slightly more private equity and U.S. large-cap exposure. Board members said the moves aim to preserve the plan's liquidity cushion while aligning long-term return expectations with the investment policy.

Board discussion and rationale

Tom (investment consultant, Marquette) and Jonathan (portfolio presenter, Marquette) reviewed the fund's fourth-quarter performance and current weightings, telling the board the plan ended 2024 at about $23 million with a 2024 return of roughly 9.8%. Jonathan said real estate stood at about 7.5% of the portfolio against a 10% target and that Principal US Property had produced redemptions in the fourth quarter; about $284,000 remained in the redemption queue. He noted private equity (Partners Group) was already overweight versus its target and that the fund pays roughly $86,777 a year in manager fees (about 38 basis points).

Board members debated several points: whether to let private equity "grow organically" rather than add to it; the liquidity profile of private equity; the need for a formal investment policy statement (IPS) change if targets were altered; and the size of the portfolio's liquidity "cushion." Jonathan and Tom presented scenario modeling showing the board's cushion at roughly $1.4 million under current weights, rising to just over $2.0 million under routine rebalancing, and that some reallocation scenarios could push the cushion under $800,000.

Actions taken

- Change core real estate target to 5% and adjust bands: The board approved an initial motion to set core real estate at 5% with a 5% band on either side and to keep private equity unchanged pending further recommendation from Marquette. The motion passed.

- Direct reallocations of the 5% removed from real estate: After additional discussion, the board approved an amended allocation directing Marquette to move 2.5 percentage points of plan assets to private equity (bringing that sleeve toward 7.5%) and 2.5 percentage points to U.S. large-cap equities. Members stated the IPS change required to reflect a new permanent target would be taken to the city council for formal adoption if needed.

- Authorize redemptions from Principal US Property: The board authorized Marquette to request additional redemptions from Principal US Property so the plan's real estate exposure reaches the 5% target. Marquette reported the plan was about $573,000 short of the 5% level given the current market values and the existing $284,000 redemption in queue; the board authorized sufficient redemptions (quarterly cutoff applies).

- Authorize high-yield manager search: The board authorized Marquette to perform a high-yield mutual fund manager search, present options at the next meeting, and phase any replacement over time rather than move all assets at once.

- Operational direction to Marquette: The board also authorized Marquette to implement cash reallocation and liquidity steps within existing investments to preserve benefits-payment liquidity while rebalancing to the new targets.

Quotations and attributions

"If you drop below the cushion...we'll be replenishing it if we need to," Jonathan said when explaining how Marquette would monitor the fund. Marquette staff described the Principal US Property redemption process as quarterly and flexible on timing.

Board member (name not specified) moved to change core real estate to 5%; a second motion later specified 2.5% to private equity and 2.5% to U.S. large-cap. Those motions passed with unanimous voice votes.

Context and background

Board materials presented at the meeting showed the portfolio was close to policy targets in most asset classes but overweight U.S. equities and private equity and slightly underweight fixed income and real estate. Partners Group was added to the portfolio in February 2022 and is drawing toward a larger share by performance and contributions; the board noted private equity is less liquid and that Partners Group is not a closed-end structure that issues cash calls.

The board asked Marquette to return at the next meeting with options for where to allocate any permanent change, to present alternatives in a way that avoids unduly reducing the liquidity cushion, and to run a high-yield manager search if the board chooses to replace Principal's high-yield fund.

Ending

Board members said they would take any formal IPS amendments to the city council for approval before making permanent policy changes. Marquette will present recommended specifics and manager search results at the next board meeting. The board adjourned after approving the motions.