I was recently looking at a Core Fund and and was looking at the statistics and it gave a % break down of what percentage of the fund was Core. Are core funds allowed to invest a small percentage into other types of strategies? Or these assets that have gone bad and are no longer considered core assets?
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Depends on the fund and it’s Prospectus. You can’t give a definitive yes or no because it’s dependent upon the mandate. With that said, I am familiar with two core funds that also invest in select value add and development projects. Of these two funds I’m thinking of, one of them can only invest a certain percent at a time in value add and development deals. For the other one, I am not familiar with the rules.
It depends on the fund and their mandate. If the fund you were looking at is an ODCE fund, then that will be governed by the index ( think its less than 25%).
These are typically intentional non-core investments (i.e. build-to-core developments, redevelopment, etc.) and not core deals that went sideways.
*Edited because text got cut off.
A few points on this...
1. "Core" can be in a fund name, but its target allocation is purposely "core-weighted", so it could just be the strategy of the fund
2. There are no official rules, each fund sets its terms in its organizational docs, they all have leeway to some (if not great) extent... still investors generally want/need funds to hold to their strategy as it impacts their portfolio management rules, return expectations, etc.
3. In practical fund management, you may need to drift on an asset, especially if you do portfolio acquisitions (which everyone in a core fund wants to do). Meaning you need to buy some non-core assets as part of a core portfolio buy.
That is far from an exhaustive list, but the point is that naming or designating a fund "core" or "opportunistic" isn't usually binding in anyway other than how that fund manager chooses to exercise it bounded by the terms of the fund docs and the will/input of the manager.
"Style drift" is what this is called, when you deviate from target, whether this gets you in trouble with your investors is really the question, if you do it too much, it could impact ability to get or retain investors (this is often a function on how successful/risky such drifts are).
I believe the ODCE index has leverage and food group restrictions, but that is merely for index inclusion. Typically core-plus funds / investors are those who are willing to take on a tad more risk, and have more ability to do so.
Correct. The ODCE index has food group, location, and leverage restrictions. For example, (and this might not be the exact restriction), but it would be 25% East, 25% west, 25 mountain, 25% Midwest. Funds will try to stay in that range with allocation of funds to keep with the index. Additionally, top leverage might be, for example, 50%. So funds will try to stay at or below that. Looking at all this, and keeping with it, funds will compare their returns to the index to compare how they are performing against in. Additionally, you have some leeway, for instance, if the fund wants to underweight retail, they can. But they may only do it to an extent because if you don’t own any retail, the consultants who assist the pensions in choosing investment managers may raise that as a red flag because you have less diversity and therefore, are more risky. And the funds may get allocated elsewhere. It’s a very interesting song and dance.
Going a little further, by looking at the index, you get implied cap rate data. So you might know, or be able to imply, that your competitors are paying an approximate 4.5% cap rate for core office assets. So you might not love a deal, but if it’s a true 5% cap, you might purchase it because from the start, you are outperforming your peer set. If you believe the asset will continue to perform steadily, even if there is something you don’t love about the deal (maybe tenant base/mix/LXD schedule) you might buy it because you believe the pros of the deal (high initial cap rate, consistent returns believed to occur) will our way the negatives (LXD schedule, credit tenancy, etc.).
You can find all the info and restrictions here: https://www.ncreif.org/data-products/funds/ , in the FAQ under What is the Universe of Funds in the NFI-ODCE? The restrictions aren't as strict as implied above it seems. ex you can have up to 65% in one region or property type, however max leverage seems to be 35%
Just to point out, the OP referred to a "Core Fund", not sure they meant to imply it was an ODCE index constituent or not.
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