Amid sluggish global growth and the prospect of rising US interest rates, some institutional investors are looking to infrastructure as a fixed income substitute, with listed funds seen as an increasingly popular route for doing so.
“Steady, but not too strong economic growth and slowly rising or stable interest rates present a good market environment for infrastructure,” said Matthias Meyer, Zurich-based head of liquid real assets for Asia and Europe at Deutsche Asset & Wealth Management. And listed funds allow investors to gain exposure to the asset class more quickly than direct investment, he noted.
The asset class delivered more than double the return of global equities and eight times that of fixed income in the June 2004 to June 2006 period of rising US interest rates, Meyer said. Performance over that most recent Fed funds tightening cycle was +63.7% for infrastructure, +28.7% for global equities and +7.7% for global bonds.
Listed infrastructure funds acquire infrastructure assets or infrastructure-related companies and offer this exposure as a tradable package. One downside is that they are usually blind pools of assets that offer little transparency of what they own, something some institutions are growing more averse to. They also attract criticism from some quarters for their management fees.
Meyer said most institutional investors had little allocation to infrastructure, and what they do have is often limited to the local market. At the same time, many are overweight real estate in their domestic market, he noted, adding to the urgency for global diversification of real asset investments.
Institutional investors typically allocate 10–25% of their portfolio to alternative investments, with infrastructure accounting for less a fifth of that or up to 2–5% of the total portfolio. Even institutions with some infrastructure exposure tend to be at the "build-up stage”, said Meyer.
He cited a Deutsche AWM institutional client based in the Middle East that wants to put a “huge” portion – more than $1 billion – of its alternative allocation into global infrastructure. He declined to say what percentage of the portfolio this represented. The institution plans to buy 100% liquid investments initially and then “cherry-pick” on the illiquid side over the next five to 10 years, noted Meyer.
He also noted that institutions in Malaysia and Thailand have made direct investments in local infrastructure projects but are looking to listed infrastructure for global diversification and stable cash flows.
Asia-Pacific listed infrastructure companies account for less than 8% of the global listed infrastructure universe and Deutsche AWM is strongly underweight Asia Pacific. “Maybe in six months you would expect this position to be higher,” he added, given that on a relative basis emerging-market infrastructure valuations are getting more attractive.
However, listed infrastructure offers limited exposure to greenfield assets, which constitute the bulk of upcoming investment opportunities in Asia. Listed companies typically focus on operating assets, which offer lower returns and lower risk than development projects.
Russell Platt, chief executive of UK-based real estate investment firm Forum Partners, said that an added benefit of allocating to infrastructure is that it can provide access to information flows that are relevant to direct real estate investments. Infrastructure is increasingly a key factor in property investing, he added.
“As you get into major cities anywhere in Asia, you’re really focused on [mass] transit-centric development," said Platt. "Where there’s less infrastructure, you can see the shape of the city change rather rapidly once infrastructure does go in.”
Deutsche AWM’s Asia and Europe liquid real asset AUM – which includes listed real estate and commodities – has grown from $5 billion in AUM in 2009 to $27 billion as of end-June this year.