Part 4 of the Asset Class ‘Back to the Future’ series. Karen Heaven looks at the 2012 Asset Class’s approach to opportunities in infrastructure and whether those opportunities remain.
What we said...
In Autumn 2012, Asset Class focused on opportunities for pension schemes in infrastructure.
Namely, a subset of what we call “Flight Plan Consistent Assets” (or “FPCAs”).
FPCAs are assets that provide stable, long-dated, often inflation-linked, cashflows. They offer an illiquidity premium and hence have characteristics that are attractive to pension schemes.
and what happened...
Since the article was written, pension schemes have seen real yields continue to fall.
As a result...
There is still an appetite for assets that provide a degree of liability matching with expected returns in excess of gilts.
Regulatory pressures which made providing funding to infrastructure investments less attractive for banks has also continued.
This means the financing gap that pension schemes can help to fill still persists.
Our 2012 article set out the importance of choosing the right capital structure and specific assets to best meet a scheme’s needs.
We illustrated this with three case studies showing different methods of accessing infrastructure:
Buying infrastructure debt
Buying an infrastructure asset outright
Accessing inflation-linked cashflows through innovative structures
Our framework for recommending investments to our clients is philosophically unchanged since we wrote this article.
Where a Scheme is off-track against its stated objectives and constraints, we take the same action: explore potential changes to the asset allocation that can be most effective in bringing the Scheme back on track versus the other assets that are available.
For this reason, we would continue to recommend infrastructure investments when:
1.) They fulfil a schemes’ individual objectives e.g. from a risk/return perspective and;
2.) They are the best alternative currently available (versus other asset classes) for doing so. It's key to consider factors such as risk/return, liquidity and complexity.
As at 31 December 2016, we largely view there to currently be better opportunities in fixed income markets versus the risk/return and liquidity trade-off that infrastructure debt offers.
We would likely propose allocations to alternative asset classes for our clients.
However, we remain very comfortable for schemes who are already invested in infrastructure debt to maintain their allocations, being as they are, long-term, illiquid investments.
Risks and expected returns offered will continue to change relative to each other through time and we remain vigilant.
Our views on asset classes will continue to evolve.
Where we are able to source innovative opportunities, such as the one outlined in the 2012 article, our views on suitability for our clients are very much formed on a case-by-case basis.
For clients with appropriate governance to make these investments, we continue to explore opportunities in this area.
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