The real estate investments in North Carolina’s pension fund, the worst performing category of investments in the pension’s portfolio, are taking a hit as a Morgan Stanley fund with $440 million in pension investments tanks.

Nearly a fourth of the state pension’s real estate holdings are with various Morgan Stanley funds — a level of exposure that raised concerns with a consulting firm that recently reviewed the performance of the Office of State Treasurer Janet Cowell. At this point, however, the pension fund may be better off waiting for the real estate market to rebound before selling any of its holdings in these funds.

Morgan Stanley Real Estate Fund VI, which the pension fund invested in during 2007, could lose $5.4 billion, or 61 percent, of the $8.8 billion international fund, according to published reports. This would be the worst loss in the history of real estate private equity. The fund bought property at the height of the market and was the largest of its type in the world.

Alyson D’Ambrisi, a spokeswoman for Morgan Stanley, declined to comment.

Previous treasurer made investments

The investment was made during the administration of previous state Treasurer Richard Moore. He had been critical of how Morgan Stanley was run in 2005, saying that “all is not well at Morgan Stanley,” and yet the pension fund invested more than $800 million with Morgan Stanley in 2007.

Moore has not returned repeated phone calls from Carolina Journal.

Morgan Stanley’s losses last year were one of the reasons that real estate investments in the $67-billion North Carolina pension fund performed even worse than its real-estate benchmark measure, according to information from the treasurer’s office. The index for private equity real estate dropped about 35 percent. North Carolina’s investments dropped almost 37 percent.

Heather Franco, a spokeswoman for Cowell, said investment staff has been monitoring the funds closely.

“There have not been investments with any Morgan Stanley funds in recent years,” Franco said.

North Carolina’s pension invested $440 million in the Morgan Stanley fund. Its investment was valued at $63.2 million at the end of 2009. The investment plunged 85.6 percent last year.

North Carolina paid the firm about $2.8 million in management fees last year.

The pension fund also has invested in two other funds run by Morgan Stanley, Morgan Stanley Real Estate Fund V and Global RE Securities.

A report by Ennis, Knupp & Associates of Chicago, which recently reviewed the treasurer’s office performance, said that Morgan Stanley funds made up a fourth of the real estate holdings in North Carolina’s pension — a level of investment that may pose excessive risk.

“Generally,” the report stated, “an allocation to one manager of greater than 20 percent may introduce a level of concentration and organizational risk to a portfolio.”

Other large managers in the pension fund’s real estate portfolio include Timberland Investment Resources, Starwood Capital Group, and UBS Realty Investors.

Losses at second Morgan Stanley fund

The Morgan Stanley Real Estate Fund V also has suffered big losses. North Carolina’s pension fund committed to invest $110 million in MSREF V in 2005. All but about $6.6 million had been invested by the end of last year. That investment was valued at about $32.5 million in December 2009, according to the treasurer’s office.

Its three-year performance at the end of 2009 was a loss of about 21 percent, and its one-year performance was down about 65 percent. North Carolina’s pension fund paid Morgan Stanley about $1 million in management fees for MSREV V.

Charles Heatherly, a former state deputy treasurer, said the prudent thing to do is to wait out the bad real estate market.

“Don’t cash it in because if you cash it in you’ll have big losses,” Heatherly said. “Real estate goes up, and it goes down. Generally, prudent investors wait it out.”

The projected $5.4 billion loss in MSREF VI was contained in reports to investors in the second quarter of 2009. Among the investments that have gone bad are the Frankfurt headquarters of European Central Bank and InterContinental Hotels in Europe. Morgan Stanley did not write down investments in reports in the last half of 2009. The fund is a 10-year fund, and its final year will be 2017.

Moore’s campaign received at least $267,170 in contributions from 2004 to 2008 from employees and people connected to firms at which the pension fund had real estate investments. He received at least $1,625 from people connected to Morgan Stanley.

Cowell’s campaign received $500 in 2008 from an employee of Morgan Stanley. Overall, she received at least $51,000 in 2008 and 2009 from real estate investors that do business with the state.

Real estate investments in North Carolina’s pension fund lost about a third of their value last year. Those investments make up less than 5 percent of the fund’s portfolio. Their value at the end of 2009 was $3 billion.

North Carolina isn’t the only state with real estate investments that tanked. In California, the real estate investments of the pension system for state employees plunged by 47.5 percent, more than three times worse than the index for that fund.

The state’s real estate investments have 36 managers. Many of the investments were made from 2005 to 2008 at the top of the market.

Sarah Okeson is a contributor to Carolina Journal.