The ‘great diversifier’

You’re probably getting a bit tired of hearing how ‘right’ the moment is for infrastructure investing and how the asset class is favoured by all sorts of institutional investors across the globe. Unfortunately, we must again bang that increasingly worn-out drum because the evidence just keeps piling up.

Yesterday, a piece of research by AMP Capital (AMP) – surveying 62 institutional investors representing a mouth-watering $1.9 trillion of capital – concluded that infrastructure is at the very top of these investors’ shopping lists. More importantly, 47 percent of the respondents have already increased their allocations to the asset class during the first quarter of this year.

We all know that low sovereign bond yields are forcing pensions and insurers to turn to other sources of long-term, stable income to offset their liabilities. We also know that infrastructure has been singled out as a viable alternative – a “great diversifier,” as the Kentucky Teachers’ Retirement System’s Gary Harbin put it.

But there’s another reason why infrastructure in particular – and alternative assets in general – are catching fire with institutional investors: it’s called the “great rotation,” which is just not ‘rotating’ as it should these days. 

For the layman, the “great rotation” is a “catch phrase for the expectation that today’s historic low bond yields will prompt investors of all types to ‘rotate’ out of bonds and into equities,” AMP succinctly explained in its survey. 

Call it the institutional investor’s Harlem Shake, if you will, except investors are failing to break into that old song-and-dance of switching to equities in the face of record-low bond yields. Instead, they are staying in bonds and fixed income, but either swapping sovereign bonds for high-yield corporate debt – or increasing their exposure to alternatives. 

This is because public equity markets are out of favour since the crisis erupted and institutional investors are wary of its volatility. In AMP’s survey, close to 40 percent of respondents signalled they planned to increase direct investments in infrastructure, real estate and private equity as an alternative to long-term equities investments. 

What these investors are effectively saying is that they are willing to take on one of infrastructure’s traditional stumbling blocks – its famous illiquidity – if it saves them the volatility that equity markets carry. And nets them the right returns, of course. 

For long-time followers of the asset class, this represents a real breakthrough. Equally importantly, old converts are expressing their willingness to invest more and more in infrastructure. 

Today, we report on how ISN, an Australian superannuation body made up of the super funds that own Industry Funds Management, said it was willing to pump an extra $14 billion into infrastructure over the next five years if the Australian government implements some changes to the investment environment. 

The main reason? “IFM infrastructure assets have delivered returns averaging more than 12 percent per annum with one third the volatility of equities,” ISN highlighted. 

Paradoxically, this capital bonanza comes amid a drought of new projects in the developed world and has already created asset inflation among the core brownfield assets everyone seems to want nowadays. And as ISN points out, there’s still plenty to be done about the enabling environment for long-term investors. 

But if all the pieces of the puzzle fall into place, a tidal wave of capital may be about to wash over the asset class.