Anthony Breault is the senior real estate investment officer at Oregon State Treasury. He manages an approximate $9 billion NAV real estate portfolio within the $70 billion Oregon Public Employees Retirement Fund. Breault joined Oregon State Treasury in 2006. He is a former officer in the U.S. Navy and prior to that worked at Jones Lang LaSalle and Schnitzer West. Breault holds a bachelor's degree in international relations from Jacksonville University.
In this interview, Breault discusses his journey from the military to real estate asset management to public pensions and how the Oregon pension fund portfolio strategy evolved over the past ten years. He also shares insights into the current real estate landscape, both domestic and international.
Mr. Breault was recently named on Trusted Insight’s Top 30 Public Pension Rising Stars. He graciously spoke with us on February 16, 2017.
Trusted Insight: You were an officer in the Navy before entering institutional investment. How did your investment career begin?
Anthony Breault: After nearly eight years as an officer in the Navy, I was recruited by LaSalle Partners (now Jones Lang LaSalle or JLL). They had a common practice of hiring junior military officers -- in addition to the typical MBA candidates, many firms source for early-stage professional careers. It was a great opportunity to get a foot in the door within the business world, while being recognized for having spent time in the military gaining management and leadership acumen.
I joined JLL in 1997 and initially started on the leasing and management side. After eight years with LaSalle, I then spent another two years working with a property development firm where I was given more of an asset management role before joining the Oregon State Treasury real estate team.
Trusted Insight: What prompted you to change from the asset management to the public pension side?
Anthony Breault: It was just a unique, but unanticipated, opportunity. While I really had no intentions of working in the public sector again after my military service, I was fortunate enough to be introduced to the prior CIO of the Oregon pension plan. I found him, his team and the job scope very intriguing. I had also lived overseas both in the military and while working with LaSalle. So one of my long-term goals was to gain more international experience. The opportunity to manage a large and diverse portfolio with a global reach, as well as interface with some of the best and brightest investors on the planet, sounded like a very intriguing and fantastic opportunity. Jobs like this don't always come along.
Trusted Insight: How is managing a pension fund different from your previous roles at asset management firms?
Anthony Breault: I think the obvious and biggest difference is that we're an allocator of capital and not a direct investor in real estate. Our primary job function within the real estate portfolio is to find, hire and assess real estate investment management firms on their abilities to execute business plans and deliver returns appropriate for our asset class. Rather than working on a specific property or portfolio of properties every day, my compensation and performance are now graded on our abilities to effectively underwrite managers -- or general partners – and, in turn, their ability to deliver property-level performance.
Trusted Insight: What do you look for in asset managers?
Anthony Breault: Our primary criteria for selecting or reviewing a manager are being able to evaluate their ability and culture to act as a fiduciary. Ultimately, most managers are investing "other peoples’ money" and, as a public pension plan, we need to fully vet the firm's ability to act as a fiduciary and a trusted partner. Our price of capital demands minimizing high levels of operational and entity (counterparty) risk. While that may be hard to assess and sometimes as much art as science in our process, a critical step in our diligence efforts is ensuring that a manager has delivered on their stated objectives, understanding how they interact with their capital partners and whether they have demonstrated a high standard of care, cultural integrity and fiduciary accountability to their investors.
Trusted Insight: Do you have a preference over managers with a broad and solid track record or those with specialized expertise?
Anthony Breault: We have approximately $9 billion in net asset value and $15 billion in gross asset value within the real estate portfolio. Given our portfolio size, it's important that we are able to invest in scale and with teams capable of executing on the long-term real estate investment themes that we need to achieve. To that end, the answer is somewhat nuanced and we have a combination of both within our portfolio. Strong track records and specialized skill sets needed to invest in the commercial real estate markets are a prerequisite of any firm seeking institutional capital. Perhaps more important than the debate over broad manager mandates versus specialized expertise is determining whether a manager has stayed true to what they do best and consistently delivers on their stated investment objectives. We are comfortable with managers across the spectrum of narrow or broad expertise, but negating style drift is important in partnership selection.
Trusted Insight: Does your military experience play a role in forming your decision making or leadership style as an investor?
Anthony Breault: I’d say my decision making style is a little tough to easily define. While being a military officer is probably 80 percent leadership and 20 percent skill-set expertise, the world of finance is probably close to opposite in nature (much more emphasis on skills and much less on leadership).
One parallel perhaps would be the military's focus on empowering people in order to motivate them to do a job well-done. You're working for something much larger than you. In a pension fund, you're also working for a program that is larger than any one individual and, with a noble goal, to make a return on investments in order to pay the beneficiaries.
I think motivating people and empowering them to make decisions and achieve both their own career goals and the pension's objectives is part and parcel to any good leader. Most of our senior staff try to provide motivation to our personnel and promote team cohesiveness. Those attributes perhaps come out more naturally from the military side where it is a central theme in the culture and primary contributor to success.
Lastly, the military tends to be very scripted and process-oriented, which are important attributes to balance in an investment shop as well.
Trusted Insight: You joined Oregon State Treasury in 2006. Can you speak a little to how the pension fund’s asset allocation strategy has changed since?
Anthony Breault: Oregon has been a long-term investor in the private markets going back over 30 years in both real estate and private equity. Like many other pension plans, we also increased our target allocations to the alternative asset classes and private markets. Over the last ten years, we have taken our real estate allocation from 6 percent to the current 12.5 percent target. We made similar increases in private equity and created a dedicated portfolio for the alternative asset classes of infrastructure, energy, hedge funds, timber and agriculture.
The real estate portfolio also underwent a significant shift in 2015. After assessing the various risks and roles of each asset class within a complex multi-asset class portfolio such as Oregon’s, our CIO was instrumental in better defining the long-term objectives and attributes needed from the real estate portfolio. To that end, and to best harmonize the unique investment attributes that real estate can deliver alongside other asset classes, real estate is now more narrowly defined as a diversifier to the broader equity beta markets, both private and public, as well as a partial inflation hedge.
In order to achieve this goal, we have been placing a greater focus on durable and resilient current income in our portfolio. So a larger exposure to core real estate is needed as we reshape our portfolio investments. In the past, the real estate portfolio had more of a total return focus that, in order to underwrite higher return objectives, took on more cyclical, structural and market-timing risks.
We also shifted to a new benchmark -- NCREIF- ODCE -- in 2016. It will most likely take us four or five years to shift the portfolio to the new objectives, and until then, it will be challenging to attribute performance against our new benchmark.
Trusted Insight: What is your outlook on real estate valuations?
Anthony Breault: I think it depends on the goal of the program one is investing to. If you're an investor who still is seeking to make the traditional 8 percent return over a typical ownership hold period, there are no magic bullets, and it is perhaps getting more difficult to achieve without using additional leverage or taking on cyclical risk. The longer this slow economic growth and low-yield environment continues, the more challenging the investment environment becomes. On the other hand, as a pension fund with a long-term investment horizon that needs to stay invested in the markets through market cycles, real estate still looks positive on a comparative basis to the other asset classes. As our CIO likes to remind us, we are market takers, not market makers, which is a good mantra for most of us.
Secondly, in my 20-plus years in real estate, I've never seen fundamentals of supply and demand as strongly in check as they are today. There is very robust demand for real assets and little new supply has been created over the past 20 years. From that perspective, this is an exceptionally good time to be a real estate investor to seek solid risk-adjusted returns. The per-square-foot prices can feel high, and the expected yield (cap rate) of some assets seem low, but the primary fundamentals needed to drive income growth remain strong. We do not expect the same appreciation and high returns going forward that we experienced the past few years, but that is not necessarily a cause for alarm. "Overvalued" is a relative term based on an investor's cost of capital or program goals. As a long-term investor in the markets with conservative underwriting disciplines, we are still finding attractively priced, high-quality real estate opportunities in the market.
Trusted Insight: How does the U.S. real estate landscape differ from international markets?
Anthony Breault: We currently have approximately 20 percent exposure to international real estate. The primary challenge for us as a U.S. dollar-denominated investor is trying to understand the expected growth potentials, while assessing the currency; legal and political risks; and appropriate premiums needed for these inherent risks. With a strengthening dollar, and historically volatile returns we've experienced in both the emerging and developed international markets, it hasn't been easy finding conviction to invest globally in either. Most of our focus will continue to be domestic for 2017 as the global economy continues its slow recovery. Eventually, our desire to consistently diversify our portfolio will take us back to the international markets, but we do not feel a need to rush the efforts while we have a higher priority to restructure our domestic portfolio to meet our new policy objectives and still find attractive U.S. real estate investments.
Trusted Insight: What trends are you following?
Anthony Breault: On the equity side, we are not seeing a lot of tactical opportunities for our portfolio. Given our need to invest in greater scale, smaller niche plays can be challenging. As for trends, it has been quite interesting seeing the single-family rental asset class emerge from the post-financial crisis, and we are keeping our eyes on the other alternative real estate sectors such as student housing, medical office, data centers, senior living, self-storage, etc. I haven't seen a clear first-mover advantage to allocating permanent capital to each of these, but I envision the trends to continue moving in this direction -- much as the multi-family asset class was newer to institutional capital only a couple decades ago.
As for demographic trends, this has been a fascinating time in real estate's evolution as urbanization and consumer experience have reshaped the look, feel and interactions within many of our growth cities. I am hopeful that this trend will continue and good planning policies in other urban centers and, in particular, suburban locations allow for the creation of newer, smaller nodes of commercial product in the outlying suburbs and living areas for many of our citizenry. Perhaps this will be one answer to maintaining the quality of life desired in the suburban corridors while alleviating struggling infrastructure trying to keep up with the demographic demand changes.
View the complete list of the Top 30 Public Pension Fund Rising Stars. Click here to view Trusted Insight's entire library of Exclusive Q&As.
In this interview, Breault discusses his journey from the military to real estate asset management to public pensions and how the Oregon pension fund portfolio strategy evolved over the past ten years. He also shares insights into the current real estate landscape, both domestic and international.
Mr. Breault was recently named on Trusted Insight’s Top 30 Public Pension Rising Stars. He graciously spoke with us on February 16, 2017.
Trusted Insight: You were an officer in the Navy before entering institutional investment. How did your investment career begin?
Anthony Breault: After nearly eight years as an officer in the Navy, I was recruited by LaSalle Partners (now Jones Lang LaSalle or JLL). They had a common practice of hiring junior military officers -- in addition to the typical MBA candidates, many firms source for early-stage professional careers. It was a great opportunity to get a foot in the door within the business world, while being recognized for having spent time in the military gaining management and leadership acumen.
I joined JLL in 1997 and initially started on the leasing and management side. After eight years with LaSalle, I then spent another two years working with a property development firm where I was given more of an asset management role before joining the Oregon State Treasury real estate team.
Trusted Insight: What prompted you to change from the asset management to the public pension side?
Anthony Breault: It was just a unique, but unanticipated, opportunity. While I really had no intentions of working in the public sector again after my military service, I was fortunate enough to be introduced to the prior CIO of the Oregon pension plan. I found him, his team and the job scope very intriguing. I had also lived overseas both in the military and while working with LaSalle. So one of my long-term goals was to gain more international experience. The opportunity to manage a large and diverse portfolio with a global reach, as well as interface with some of the best and brightest investors on the planet, sounded like a very intriguing and fantastic opportunity. Jobs like this don't always come along.
Trusted Insight: How is managing a pension fund different from your previous roles at asset management firms?
Anthony Breault: I think the obvious and biggest difference is that we're an allocator of capital and not a direct investor in real estate. Our primary job function within the real estate portfolio is to find, hire and assess real estate investment management firms on their abilities to execute business plans and deliver returns appropriate for our asset class. Rather than working on a specific property or portfolio of properties every day, my compensation and performance are now graded on our abilities to effectively underwrite managers -- or general partners – and, in turn, their ability to deliver property-level performance.
Trusted Insight: What do you look for in asset managers?
Anthony Breault: Our primary criteria for selecting or reviewing a manager are being able to evaluate their ability and culture to act as a fiduciary. Ultimately, most managers are investing "other peoples’ money" and, as a public pension plan, we need to fully vet the firm's ability to act as a fiduciary and a trusted partner. Our price of capital demands minimizing high levels of operational and entity (counterparty) risk. While that may be hard to assess and sometimes as much art as science in our process, a critical step in our diligence efforts is ensuring that a manager has delivered on their stated objectives, understanding how they interact with their capital partners and whether they have demonstrated a high standard of care, cultural integrity and fiduciary accountability to their investors.
Trusted Insight: Do you have a preference over managers with a broad and solid track record or those with specialized expertise?
Anthony Breault: We have approximately $9 billion in net asset value and $15 billion in gross asset value within the real estate portfolio. Given our portfolio size, it's important that we are able to invest in scale and with teams capable of executing on the long-term real estate investment themes that we need to achieve. To that end, the answer is somewhat nuanced and we have a combination of both within our portfolio. Strong track records and specialized skill sets needed to invest in the commercial real estate markets are a prerequisite of any firm seeking institutional capital. Perhaps more important than the debate over broad manager mandates versus specialized expertise is determining whether a manager has stayed true to what they do best and consistently delivers on their stated investment objectives. We are comfortable with managers across the spectrum of narrow or broad expertise, but negating style drift is important in partnership selection.
Trusted Insight: Does your military experience play a role in forming your decision making or leadership style as an investor?
Anthony Breault: I’d say my decision making style is a little tough to easily define. While being a military officer is probably 80 percent leadership and 20 percent skill-set expertise, the world of finance is probably close to opposite in nature (much more emphasis on skills and much less on leadership).
One parallel perhaps would be the military's focus on empowering people in order to motivate them to do a job well-done. You're working for something much larger than you. In a pension fund, you're also working for a program that is larger than any one individual and, with a noble goal, to make a return on investments in order to pay the beneficiaries.
I think motivating people and empowering them to make decisions and achieve both their own career goals and the pension's objectives is part and parcel to any good leader. Most of our senior staff try to provide motivation to our personnel and promote team cohesiveness. Those attributes perhaps come out more naturally from the military side where it is a central theme in the culture and primary contributor to success.
Lastly, the military tends to be very scripted and process-oriented, which are important attributes to balance in an investment shop as well.
Trusted Insight: You joined Oregon State Treasury in 2006. Can you speak a little to how the pension fund’s asset allocation strategy has changed since?
Anthony Breault: Oregon has been a long-term investor in the private markets going back over 30 years in both real estate and private equity. Like many other pension plans, we also increased our target allocations to the alternative asset classes and private markets. Over the last ten years, we have taken our real estate allocation from 6 percent to the current 12.5 percent target. We made similar increases in private equity and created a dedicated portfolio for the alternative asset classes of infrastructure, energy, hedge funds, timber and agriculture.
The real estate portfolio also underwent a significant shift in 2015. After assessing the various risks and roles of each asset class within a complex multi-asset class portfolio such as Oregon’s, our CIO was instrumental in better defining the long-term objectives and attributes needed from the real estate portfolio. To that end, and to best harmonize the unique investment attributes that real estate can deliver alongside other asset classes, real estate is now more narrowly defined as a diversifier to the broader equity beta markets, both private and public, as well as a partial inflation hedge.
In order to achieve this goal, we have been placing a greater focus on durable and resilient current income in our portfolio. So a larger exposure to core real estate is needed as we reshape our portfolio investments. In the past, the real estate portfolio had more of a total return focus that, in order to underwrite higher return objectives, took on more cyclical, structural and market-timing risks.
We also shifted to a new benchmark -- NCREIF- ODCE -- in 2016. It will most likely take us four or five years to shift the portfolio to the new objectives, and until then, it will be challenging to attribute performance against our new benchmark.
Trusted Insight: What is your outlook on real estate valuations?
Anthony Breault: I think it depends on the goal of the program one is investing to. If you're an investor who still is seeking to make the traditional 8 percent return over a typical ownership hold period, there are no magic bullets, and it is perhaps getting more difficult to achieve without using additional leverage or taking on cyclical risk. The longer this slow economic growth and low-yield environment continues, the more challenging the investment environment becomes. On the other hand, as a pension fund with a long-term investment horizon that needs to stay invested in the markets through market cycles, real estate still looks positive on a comparative basis to the other asset classes. As our CIO likes to remind us, we are market takers, not market makers, which is a good mantra for most of us.
Secondly, in my 20-plus years in real estate, I've never seen fundamentals of supply and demand as strongly in check as they are today. There is very robust demand for real assets and little new supply has been created over the past 20 years. From that perspective, this is an exceptionally good time to be a real estate investor to seek solid risk-adjusted returns. The per-square-foot prices can feel high, and the expected yield (cap rate) of some assets seem low, but the primary fundamentals needed to drive income growth remain strong. We do not expect the same appreciation and high returns going forward that we experienced the past few years, but that is not necessarily a cause for alarm. "Overvalued" is a relative term based on an investor's cost of capital or program goals. As a long-term investor in the markets with conservative underwriting disciplines, we are still finding attractively priced, high-quality real estate opportunities in the market.
Trusted Insight: How does the U.S. real estate landscape differ from international markets?
Anthony Breault: We currently have approximately 20 percent exposure to international real estate. The primary challenge for us as a U.S. dollar-denominated investor is trying to understand the expected growth potentials, while assessing the currency; legal and political risks; and appropriate premiums needed for these inherent risks. With a strengthening dollar, and historically volatile returns we've experienced in both the emerging and developed international markets, it hasn't been easy finding conviction to invest globally in either. Most of our focus will continue to be domestic for 2017 as the global economy continues its slow recovery. Eventually, our desire to consistently diversify our portfolio will take us back to the international markets, but we do not feel a need to rush the efforts while we have a higher priority to restructure our domestic portfolio to meet our new policy objectives and still find attractive U.S. real estate investments.
Trusted Insight: What trends are you following?
Anthony Breault: On the equity side, we are not seeing a lot of tactical opportunities for our portfolio. Given our need to invest in greater scale, smaller niche plays can be challenging. As for trends, it has been quite interesting seeing the single-family rental asset class emerge from the post-financial crisis, and we are keeping our eyes on the other alternative real estate sectors such as student housing, medical office, data centers, senior living, self-storage, etc. I haven't seen a clear first-mover advantage to allocating permanent capital to each of these, but I envision the trends to continue moving in this direction -- much as the multi-family asset class was newer to institutional capital only a couple decades ago.
As for demographic trends, this has been a fascinating time in real estate's evolution as urbanization and consumer experience have reshaped the look, feel and interactions within many of our growth cities. I am hopeful that this trend will continue and good planning policies in other urban centers and, in particular, suburban locations allow for the creation of newer, smaller nodes of commercial product in the outlying suburbs and living areas for many of our citizenry. Perhaps this will be one answer to maintaining the quality of life desired in the suburban corridors while alleviating struggling infrastructure trying to keep up with the demographic demand changes.
View the complete list of the Top 30 Public Pension Fund Rising Stars. Click here to view Trusted Insight's entire library of Exclusive Q&As.