By Terry Mellish, head of UK/Ireland business and global consultant relations, Natixis Global Asset Management
Today the search for yield is on. Initially quantitative easing pushed gilt yields down, partly resulting in a flight to corporate bonds. The loss of investor confidence in the sovereign credit markets saw this trend gain further momentum, leaving even investment grade corporate debt with a relatively low yield. At a time when pension funds are already having to manage growing liabilities, trustees are now facing the additional challenge of trying to source new streams of income to match these.
In this difficult environment there is one obvious way investors can bridge the income gap. Infrastructure ticks all the boxes in that it provides predictable, inflation- linked returns over a long-term investment horizon. It is also the ultimate tangible asset, even offering the potential for capital appreciation. Furthermore it benefits hugely from being uncorrelated to other asset classes, providing a genuine source of diversification; this is a great draw for investors looking to construct durable portfolios that manage risk effectively. There are a range of investment options for investors to consider. Infrastructure debt, part of the project finance universe, is likely to be most familiar to pension funds. This form of investment offers all the opportunities associated with infrastructure investment generally, but goes even further in terms of the risk/return profile as it offers increased capital stability on account of debt’s better position in the capital structure. There is also the reassurance that project finance has a transparent, high level of credit quality, as it is covered by the main credit ratings agencies. A combination of increased momentum behind infrastructure generally and regulatory changes to the banking sector are likely to lead to increased asset flows into infrastructure debt from institutional investors. In terms of types of infrastructure, brownfield and environmental projects are proving popular. These include the transport and social, power and renewable, natural resource and offshore and telecom sectors. Again this area comes with all the benefits of infrastructure investment and will only offer a more extensive menu of options moving forward as global demand for the financing of these types of projects increases. A slightly less traditional option is the real estate alternatives market, which refers to those assets that fall between property and infrastructure; examples include social housing, student accommodation, health care, retirement homes, the leisure sector and garages. For pension funds and other institutional investors the appeal of a fund comprising these assets is that it not only provides an inflation-linked stream of income, it goes even further to deliver positive real asset growth, on account of the types of property held, and even has the potential to beat inflation, due to the rental incomes generated. Infrastructure investment is likely to continue to gain momentum, due to the strong endorsement it is receiving from the UK government. It began last year with Chancellor George Osborne announcing plans to raise £20bn from pension funds to invest in infrastructure projects and the government has been courting the industry ever since. This has gained pace since then, with six large pension schemes signed up to the new Pensions Infrastructure Platform, a vehicle by which funds can back projects. The recent announcement that the government is considering giving local authority pension schemes greater freedom to invest in infrastructure under new proposals, which are part of wider consultation launched at the beginning of November, is also driving interest. Everything appears to be falling into place for infrastructure investment to become a real solution for institutional investors caught in today’s income drought. Not only does it provide predictable, inflationlinked returns, but the move to infrastructure forms part of the wider trend of investors diversifying through alternatives in order to build more durable portfolios.
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