Sacramento County sets its first ag investment target

The $8.3bn pension has changed return benchmarks and earmarked one-fifth of its 7% real assets allocation for agriculture, timber and other natural resources investments.

The Sacramento County Employees Retirement System has for the first time set specific targets for its agricultural investments as it seeks to grow its real assets holdings in a more systematic fashion.

In January, SCERS’s board approved an increase in its real assets target allocation from 6 percent to 7 percent (excluding real estate). Whereas agriculture, timber and other natural resources investments had previously been combined with infrastructure and energy to form a single real assets category, SCERS’s board has now approved a recommendation to define targets and ranges for each sub-strategy, according to meeting materials posted on the $8.3 billion pension’s website.

Following the advice of Cliffwater, its investment consultants, the changes call for SCERS to allocate 45 percent of its real asset investments to infrastructure, 35 percent to energy and 20 percent to agriculture.

“Early in the build-out of the real assets asset class, energy investments have comprised the largest allocation. However, it is expected that infrastructure will increase in size within the portfolio, as well as agriculture, timber and other natural resource investments,” said chief investment officer Steve Davis. “Agriculture investments will also be global in nature, with a particular focus on investments within developed-market countries and a few emerging-market countries.”

Also discussed in the memo is a move to replace its existing inflation-based benchmarks with the NCREIF agriculture and timberland indices, respectively.

“SCERS is seeking to move away from objective-based benchmarks such as this [CPI-U + 5 percent], and towards more representative, investible and comparable benchmarks,” Davis noted. “There can be significant divergences between actual returns and benchmark returns, especially over shorter and medium terms, when using objective-based benchmarks.”

As of the end of December, agriculture, timber and other accounted for just 2 percent of the SCERS portfolio. SCERS has yet to make any timber investments, but is currently working with Cliffwater to find opportunities in the market, according to the document.

Overall, SCERS will target 10 to 20 real asset investment manager relationships and vehicles including open- and closed-ended funds as well as “larger strategic partnerships” as part of its effort to reach the 7 percent real asset allocation, which Cliffwater expects will take until 2021 to accomplish.

Cliffwater’s recommendations call for SCERS to increase its annual commitment pace from $150 million to $160 million through 2019 and further to $220 million annually between 2020 and 2026, according to the meeting materials.

Cliffwater representatives declined to comment. SCERS representatives had not returned messages seeking further comment at the time of publication.