Tokyo Summit: ‘Volatility is an opportunity’

Negative interest rates are pushing Japanese investors to see infrastructure as a fixed income substitute, giving an edge to the listed end of the asset class, panellists argued today.

When a Japanese pension fund with little experience in direct investing wants to grow its alternatives allocation fourfold in a matter of years, how does it go about it? Answer: it boosts its exposure through open-ended structures. Or at least that was the view of four panellists discussing the merits of listed versus unlisted infrastructure at our Tokyo Summit today.

That included Kengo Torii, portfolio manager for Denso Pension Fund, who explained his institution is looking to grow its private equity and infrastructure allocation from 5 percent to 20 percent, having started an infrastructure programme in 2014.

In principle, he said, Denso Pension is relatively agnostic about the structures it chooses to access the asset class. “What we’re interested in is the stable growth of our fund, whether through public or private infrastructure,” he noted.

Still, he underlined Denso Pension’s appetite for the more liquid type of infrastructure, in particular when encapsulated in open-ended structures. As Hidekazu Ishida, chief advisor at consultancy System 2, noted, negative interest rates have put infrastructure front of mind, owing to what he described as its fixed income-like characteristics.

Yet Paul Newfield, chief investment officer at Morrison & Co, cautioned about pinning one’s decision solely on the macroeconomic environment. “Falling interest rates is not just something of the last five years. Interest rates have been falling since the early 1980s.” Given infrastructure’s relative youth as an asset class, he noted, “the industry has very little expertise on how to manage infrastructure stocks when interest rates start to rise”.

He encouraged the audience to focus not just on yield, but also on the secular trends that support the growth of businesses: decarbonisation through renewables and energy efficiency, or globalisation through airports.

“If you have a long-term perspective, if you don’t have to sell, volatility is an opportunity,” he argued, observing that the daily pricing reminders listed infrastructure offers, while testing the nerves of investors at times, can also provide them with transparency. “The difference with listed infrastructure is that sometimes the world gets cheap, and you can take advantage of that.”

Enthusiasm for listed infrastructure, perhaps unsurprisingly, extended to Yasuyuki Konuma, senior executive officer of the Tokyo Stock Exchange. In the future, he said he would be happy to see the Japanese listed universe expand beyond domestic assets to include yen-denominated funds including overseas infrastructure. More could be done to privatise Japan’s toll roads and airport concessions, he added.

“The listed market is almost open-ended,” concluded Matt Dimon, a director at InfraRed Capital Partners. “It behaves like it: you can come and go.”