Follow the Oregon Trail

A recent move by the Oregon Investment Council gives pensions in the US plenty of reasons to follow suit, writes Cezary Podkul.

If a recent pension board meeting is any indication, the year is off to a good start for the infrastructure asset class. Last week the Oregon Investment Council approved a new 5 percent “alternative investment” allocation for its $56.7 billion Public Employees Retirement Fund.

The allocation is aimed at giving the fund exposure to alternative investments already not included in its portfolio, including infrastructure, natural resources and hedge funds. Infrastructure alone will be targeted at up to 45 percent of the alternatives allocation.

The move marks the first time the pension has carved out a specific target allocation to the asset class. Oregon had previously invested in infrastructure on an opportunistic basis, inking a $200 million commitment to Alinda Infrastructure Partners II in 2008 as part of that strategy. With a formal allocation for such investments, more commitments could follow at a steady pace.

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That’s especially important because Oregon is no stranger to investing with private fund managers. The pension began investing with private equity managers more than 30 years ago when it first backed funds managed by Kohlberg Kravis Roberts – a relationship which continues to this day. Just as Oregon blazed a path for pension investing in private equity in the early 1980s, it may now help do the same for infrastructure. After all, private equity investments “have been the most successful in Oregon’s portfolio”, Oregon said in a recent statement. So history has been on its side before.

Oregon’s move illustrates how pension allocations continue to evolve in the US and how that evolution benefits the infrastructure asset class. In keeping with classic portfolio allocation theory, Orgeon saw “increased diversification” as a key merit of creating the alternatives portfolio, according to a pension document. But it didn’t want to just diversify into anything: it wanted assets that would help “normalise” its overall return distributions. That calls for assets with strong down-side protection and an inflation protection. And that, as readers of this website know all too well, often spells infrastructure.

But an emerging trend is also apparent in Oregon’s new allocation. Besides infrastructure, the pension also bundled other “hard” assets – commodities, timber and agriculture and natural resources – into its new allocation. Whether they call them “hard” or “real”, many pensions are now thinking of allocating to these sorts of assets, providing infrastructure yet another way of getting into the portfolio. So pensions across the country have plenty of reasons to follow the Oregon Trail.