Infra investors aim to adapt to rising rates
Infrastructure investors want higher returns to compensate for rising interest rates and bond yields and are increasingly turning to actively managed pooled investments, according to the results of an investor survey conducted by AsianInvestor and QIC.
A total of 30% of respondents ranked “cash yield and income” as the main factor influencing their investment decisions. They also want meaty returns, with 53% quoting a target of 8% to 10% and another 22% of respondents targeting a return of 10% to 12%.
The March survey asked investors to provide information about their allocation strategies and to indicate their preferred investment approach. A similar survey was conducted by AsianInvestor and QIC in 2016.
The latest results predict a swing back into traditional assets like bonds and fixed income as global interest rates rise. They also highlight the need for asset owners to pick opportunities that offer the best relative value.
In tandem with a focus on yield is an increased interest in pooled products. Indeed, the survey results show a clear shift away from direct investment, falling from 30% as the preferred access point for investors in 2016 to 20% in the latest survey. At the same time, preference for pooled investments has increased from 41% in 2016 to 48% in 2018.
ACTIVE VALUE
Melannie Pyzik, an investment specialist in QIC’s global infrastructure team, said the popularity of pooled vehicles is related to investors seeing value in active management.
“You really need strong expertise in the sector to deliver value and you need to be an active manager,” Pyzik said. “If investors want to reach the allocation targets that offer the higher returns they have to partner with managers that have the expertise and manpower to critique each opportunity.”
Over the coming months, QIC expects allocations to pooled vehicles to grow, in line with the market’s understanding of how the products work.
“The biggest challenge for investors who are new to these vehicles is gaining comfort around elements like currency and liquidity risk, and how [net asset values] are calculated using unrealised valuations,” Pyzik said. “These are new concepts for a lot of investors who want to be sure that they aren’t overpaying for assets.”
QIC is confident that its track record in performing through cycles will attract asset owners to its products.
The Brisbane-based asset manager is in the process of investing a A$2.35 billion ($1.82 billion) Global Infrastructure Fund, which it closed in February 2017. QIC has a two-year target to invest the funds and has executed three deals so far: a share in Lochard Energy, a gas storage and processing facility in the state of Victoria; a stake in the privatised Port of Melbourne; and a joint venture, PARF, with utility company AGL to build solar and wind farms.
As a manager of A$9.9 billion in infrastructure assets, QIC is a keen observer of industry trends.
NEW INVESTMENT VEHICLES
Pyzik said the market in pooled products has expanded over the past few years as more managers have joined the infrastructure bandwagon. New hybrid structures are appearing with optionality around open-ended funds and co-investment rights are gaining in popularity.
Co-investment offers a pension fund investor the right to invest in certain targets directly with the asset manager. The targets are often large and held outside of the pooled fund.
“We get asked regularly about co-investments,” said Ross Israel, head of global infrastructure at QIC, claiming the topic gets as much airtime in some meetings as performance. “Co-investments have appeal [for] many funds – they allow investors to weight or tilt exposures by geography, lifecycle, risk return or sector.”
The co-investment process brings added costs and its own staffing challenges to investors but it has the positive benefits of reducing management fees and potentially offering the investor governance in an asset, depending on its size.
MORE ACCOUNTABILITY
One trend to emerge from the AsianInvestor/QIC survey is the call for more accountability from product developers. Nearly 35% of respondents said a lack of transparency in pooled funds and high valuations were their greatest challenges to investing in the asset class.
Israel agrees transparency could be improved. “Fee transparency is an ongoing focus, especially for Australian investors,” he said. “They want managers to have a clear view of the costs of running their portfolios and to convey their value-add to assets and portfolio construction.”
Israel believes investors will increasingly drive more transparency from pooled infrastructure funds and their managers.
Accountability is enhanced when the asset manager has skin in the game and Pyzik advises that this should be one of the criteria when choosing a pooled fund.
“The manager’s interests need to be aligned with the interests of the investor,” she said. “Either the manager should have equity in the fund or the incentives for employees should be tied to outperformance and not just to accruing a base fee. These are usually long-term investments, so the alignment has to be monitored regularly, throughout the duration of the relationship.”
The survey, conducted in March, gathered feedback from all types of firms, including family offices and endowments. Overall, 18% of respondents said they worked for insurance companies, 42% represented commercial banks and 16% were from public and corporate pension funds. Geographically, the majority of investors hailed from Hong Kong, Australia, Japan, Thailand, the Philippines and Singapore. Full results will be published in the next print edition of AsianInvestor.