New Mexico eyes infra, energy in slow-growth economy

CIO Robert 'Vince' Smith talks about infra's strong performance and why he wants more of it to help round out the $21.5bn endowment's real return portfolio.

New Mexico State Investment Council’s infrastructure-heavy real return portfolio is generating strong returns in today’s market environment and favours the permanent endowment’s strategy to make cash-generating investments.

The $1.06 billion real return portfolio – comprising energy, infrastructure, timber and agriculture and others – returned a net 12.5 percent for the $21.5 billion endowment in 2016, according to NMSIC’s annual investment plan. This beats real estate’s 8.2 percent return during the same period and private equity’s 11 percent gains over 12 months ending in March. The portfolio increased by $466.7 million year-to-year.

“The infrastructure portfolio has been the best of that whole group over the last five or six years,” Robert 'Vince' Smith, NMSIC’s chief investment officer, told Infrastructure Investor. “Those investments are very good at producing cash returns, so income. Across the portfolio, we’re favouring investments that produce income as a larger portion of their total rate of return.”

NMSIC committed, or has expected commitments of, around $300 million this year to its real return portfolio. Macquarie Infrastructure Partners IV collected $100 million from the endowment, and Agriculture Capital Management received $50 million. NMSIC said it is also expected to allocate $50 million each to BlackRock’s Global Renewable Power Fund II, midstream fund EnCap Flatrock IV and energy production vehicle NGP XII.

Smith indicated the endowment has met its timber and agriculture targets and will now focus on infrastructure and energy, as its forecasted 2018 real return allocation drops from $300 million to around $175 million a year until the real return portfolio is fully invested.

The real return portfolio has a 12 percent target allocation from each of NMSIC’s two permanent funds, and those two funds are 95 percent of NMSIC’s total portfolio. Seventy-five percent of the allocation is for hard assets and the rest for financial assets.

NMSIC began investing in real return assets in 2011 to diversify its portfolio from high equity and risk exposure, Smith said. Now, in a slow-growth economy, with modest interest rates and stable inflation, the steady cashflow that is a hallmark of infrastructure investments is looking attractive.

“Generally, the belief is that now is not a time to chase returns, but instead is a time to protect capital,” NMSIC said. But Smith explained NMSIC’s real return strategy is not easily influenced by external market conditions.

“I don’t think we’re constructing it in any particular way because of that environment,” he said. “If we had a higher-growth environment, I guess the question then would be: ‘Would we construct it differently?’– and I don’t know that we would.”