Bond, stock underperformance to drive inflow

Traditional fixed income and equity investing is failing to deliver. And infrastructure is positioned to gobble up disillusioned institutional capital, according to industry personnel.

Demand for traditional bond-like returns and aversion to equity volatility are teaming to spur institutional demand for infrastructure in the US – a trend likely to grow, sources say.

“Bond market performance has been disappointing,” pointed out Kyle Mangini, global head of infrastructure for Industry Funds Management (IFM).

The July yield-to-worst for the Barclays US Aggregate Bond Index was 1.83 percent, while the Barclays Global Aggregate Bond Index recorded a 1.89 percent yield-to-worst.

Meanwhile, the 10-year US Treasury Rate slumped to a record low. As of Monday, July 16, the 10-year note slumped to 1.44 percent. That low surpassed a previous 1.43 percent mark set June 1.

Return on fixed income has been “candidly disappointing,” noted Bernie McNamara, executive director with JP Morgan Asset Management.

Because of that, infrastructure as an asset class is “replacing fixed income,” according to Matthew Botein, alternative asset head for BlackRock.

BlackRock, founded in 1988 as a fixed income specialist, is adapting to that burgeoning trend. The $3.5 trillion money manager is fresh off its acquisition of Swiss Re Private Equity Partners, a funds of funds operator with significant exposure to infrastructure.

Likewise, Allianz Global Investors, owned by the Munich, Germany financial services concern Allianz, has delved into infrastructure debt – “currently more attractive” than fixed income, according to the company.

If BlackRock and Allianz illustrate how the traditional buy side is angling to accommodate investor demand for infrastructure, fundraising is similarly following suit.

Global Infrastructure Partners (GIP) recently raised its $7.5 billion hard cap on its second fund offering to more than $8 billion. A second US infrastructure fund from Macquarie Group was fully invested in 2012, and the pioneering Australia-headquartered company is said to be planning a third offering.

In the aftermath of the ill-fated “gold bug” phenomenon, infrastructure is also becoming an appropriate hedge against inflation, Mangini stressed.

His IFM, a company with $35 billion under management, $10 billion of which is invested in infrastructure, recently secured a $500 million allocation from CalSTRS, or California State Teachers’ Retirement System.

In announcing its investment with IFM in February, Chris Ailman, chief investment officer of the $150 billion pension fund, noted the defensive use of infrastructure.

“Infrastructure is the most direct hedge against inflation,” agreed McNamara.

In addition to being a direct investor in infrastructure JPMAM, a unit of Wall Street firm JPMorgan Chase, recently published a white paper entitled “The Realization,” arguing increased “real asset” allocation is inevitable.

McNamara said that, in addition to fixed income, equity market volatility is taking a toll on investor patience, and prompting a greater inspection of infrastructure.

Pointing out that stock performance has posted an annualised 2.9 percent return over the past decade, McNamara claimed the longtime industry standard 60-40, equity-to-fixed income model will change to incorporate infrastructure.

A usual pension fund will have a 5 percent to 8 percent real asset allocation, McNamara says. Should the current market environment persist as expected, portfolio rebalancing in the next decade could result a “new normal” 25 percent real asset allocation, he adds.

“Additionally, infrastructure is clearly an underinvested real asset subtype,” JPMAM in its “The Realization” report stated.