Building your portfolio
THEY shunned infrastructure at the height of the downturn, but now pension funds are starting to flock back to the asset class in search of an inflation-hedged alternative with long-term attractive yields.
The Global Alternatives Survey, conducted by Towers Watson and the Financial Times and published earlier this week, showed that pension funds allocated more assets to infrastructure in 2009 than in 2008 – pouring $99bn into infrastructure last year, up from $70bn.
This is unsurprising. “Infrastructure assets have very predictable and therefore recurrent earnings streams that support attractive yields and also offer attractive growth prospects as the demand for infrastructure assets grows over time,” says Justin Lannen, who runs the CF Macquarie Global Infrastructure Securities fund.
Mercer’s Amarik Ubhi adds: “Investments in these assets can potentially give genuine diversification within a portfolio, while still providing an element of growth and/or yield. This is important for investors who suffered during the crisis but who still need growth to improve funding levels in a less volatile manner.”
But while the asset class is straightforward, the structures used by managers can be complex and require a greater degree of time, effort and resources than traditional asset classes. Furthermore, says Mercer’s Ubhi, they are typically illiquid in nature while fee structures can also be difficult to understand and opaque in nature.
Understandably, it is the larger, more sophisticated investors who are looking at and making allocations to infrastructure. Ubhi adds that these investors have allocated considerable amounts to infrastructure over the past year, and in sterling terms, Mercer’s clients’ exposure is significant.
There should be plenty of opportunity to invest in infrastructure. The Organisation for Economic Cooperation and Development expects infrastructure investment in its 31 members to increase substantially over the next 20 years. This doesn’t include the massive boom that is occurring in emerging markets.
Macquarie’s Lannen adds: “With government finances under even more pressure, there are likely to be ongoing opportunities for private investment in infrastructure as governments continue to privatise state-owned assets and as new projects are facilitated by the private sector under contracts with government.”
One manager that has targeted such private finance initiatives (PFIs) is Gravis Capital Partners (GCP). About a year ago, GCP launched an open-ended infrastructure fund focusing on subordinated debt in the UK PFI space. The open-ended fund has a partially inflation-protected return of 8 per cent per annum. It is setting up a closed-end feeder fund with £65m of assets in the pipeline, which is expected to list at the end of this month.
Infrastructure investment is taking off in both North America and mainland Europe. UK investors need to be on the ball if they are to take the same road.