The board of Calpers, the biggest U.S. public pension fund, voted on Monday to drop real-estate stocks from its property portfolio by eliminating real estate investment trust holdings and focusing instead on private transactions.

The shift toward private deals for core properties will be gradual and is intended to reduce risk to the overall portfolio of Calpers, the $229 billion California Public Employees' Retirement System.

The transition also is meant to generate income from real estate holdings primarily in the United States and serve as a hedge against inflation.

Calpers' investment staff has focused on improving risk management under Chief Investment Officer Joseph Dear as the fund recovers from steep losses in the wake of Lehman Brothers' bankruptcy.

Assets of the fund, which earned a 12.5 percent return last year, fell to a low of $160 billion in March 2009, after having peaked at $260 billion in 2007.

The value of Calpers' real estate assets declined 5 percent last year, their smallest loss since the financial crisis. Steep losses in the real estate portfolio since the downturn have prompted Calpers to drop some asset managers and place holdings with managers who outperformed peers in recent years.

Calpers will continue to invest in real estate stocks within in its equity portfolio.

(Reporting by Jim Christie; Editing by Steve Orlofsky)

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