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Fixed Income

Getting the foundations in place

Getting the foundations in place

By Pádraig Floyd
Tuesday 3rd March 2015

Infrastructure remains an attractive asset class for investors, but there is much to consider before jumping in, Pádraig Floyd finds.

"There is no shortage of potential investors for infrastructure, but what we need from the government is a pipeline of projects to invest into."

Mike Weston

Good investment is all about keeping your  options open. Never burn your bridges, we  are told from an early age, and until  recently,  institutional investors were  advised  against building them, too.

However, infrastructure has become a  word that, if not on the lips of every pension  fund trustee in the UK, has certainly  been one at the back of their minds.

The NAPF’s annual survey shows only 18%  of schemes invest in infrastructure, though  this has increased from 15% in 2012.  Those investing had an average allocation  of 3.5% in 2014, a healthy increase on both  2012 (2.7%) and 2013 (3.2%).

Penny Green, an independent trustee, can  see the attraction and invested when in  charge of the Superannuation Arrangements  of the University of London (SAUL):  “We are all searching for yield and infrastructure  – if it’s the right type – can throw  off index-linked returns. This makes it a super  proxy for defined benefit (DB) pensions  should you be able to find access to those  that have sufficient diversification, low levels  of leverage and low – or at least satisfactory  – levels  of fees.”

This has been the problem for many  schemes over the last decade. They’ve  looked longingly at infrastructure as being  at least a part of the solution to provide long  term inflation-linked cashflows, but have  fallen short.

John Nestor, an independent trustee with  Law Debenture, says some of the difficulties  are inherent to infrastructure: “It’s an  asset class which is very capital-intensive, it  requires scale, it is illiquid and requires  commitment to a very long time horizon.

“It is important you have expertise you can  draw on either from the fund or your  adviser,  to be able to understand whether  you are being paid for the risk you are taking  on for that illiquidity.”

This is where so many dreams have been  shattered, because schemes simply didn’t have the resources to do this on their own.

DO IT YOURSELVES  

This was the primary motivation for the formation of the Pensions Infrastructure Platform (PIP) last year. And in December, the London  Pensions Fund Authority (LPFA) announced the formation of a  £10bn north-south asset liability management  partnership with Lancashire County  Council,  designed to create a jointly-invested  pool of assets to be overseen by an  FCA-registered company to be formed by  both funds.

This departure will give the funds the scale  and levels of governance required to access  a broader range of assets, including illiquid  assets like infrastructure.

Just last month, Greater Manchester  Pension  Fund announced a £500m joint  infrastructure programme with LPFA (see box-out below).

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