"The broad real estate markets are in transition," says TownsendGroup principal Micolyn Yalonis in an executive summary of therevised investment strategy, a five-year planning document that isreviewed annually. "Re-pricing is expected but has not begun toclear within market transactions or asset valuations."

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Given that the Core portfolio is projected to be 49% at the endof 2010 and the longer-term goal is 30%, "Townsend does notrecommend new Core allocations and will instead continue to focusnew allocations in the non-core strategies," states an executivesummary of its real estate investment recently approved by theSFERS' Board of Retirement. Specific strategies will be reviewed bythe Board later this year.

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In the Non-Core sector, Townsend says it will focus its duediligence efforts and resulting recommendations on niche strategies(e.g. non-traditional property types, unique market opportunities)and international opportunities for excess returns. Morespecifically, Townsend says it will look for "Value and High Returnpooled funds capable of providing unique access to opportunities(property type, platform, property life cycle) and advantageousfunding capabilities (pre-specified pools and/or short investmentwindows) to facilitate maintaining the funded status of theprogram."

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As part of that effort, Townsend is recommending two newcommitments to Capmark Investments—a $25-million allocation toCapmark Apartment Income and Growth Fund and a $37.5-millioninvestment in Capmark High Return Fund. In late 2006, SFERScommitted $25 million and $75 million to the two funds,respectively.

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Capmark and SFERS are 50-50 owners of the Apartment Income andGrowth Fund, which focuses on value-add and higher-returnstrategies in the US apartment market, including niche productslike student housing. The High Return Fund will invest in allproperty types and credit enhancement opportunities with a returngoal of net 15% IRR to the investor.

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As for the rest of this fiscal year, SFERS likely will invest$100 million less than projected ($1.27 billion) in Coreinvestments and approximately $100 million more than projected($486 million) in Non-Core investments, according to Townsend.

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The Board also made moves earlier this year to balance itsportfolio, which became overweight in Core last year after its 80%interest in AMB Partners II was transferred from the Value sectorto the Core sector after that fund's development piece had maturedand the other fund assets had stabilized to the point where theirreturns would be lower.

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To shift some of the funds back to the Value sector, SFERSdecided inMarch to transfer its interest in AMB Partners II to AMBInstitutional Alliance Fund III. The move also will give it moreflexibility to liquidate its interest and shift some of itsinterest away from Industrial, giving the portfolio more balance inthat respect as well.

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Also that month the Board committed $25 million to the FidelityReal Estate Opportunistic Income Fund LP, a new funds that willinvest primarily in high yield real estate debt securities andinstruments backed (directly and indirectly) by commercialproperty. Some of the capital will be invested in residentialmortgage-backed securities and subordinated securities of realestate CDOs, according to staff and advisor memos.

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