Two-thirds of pensions plan fresh infra commitments

With defined-benefit investor appetite set to rise, 13% of institutions say they will look to infrastructure for short-term opportunities.

Commitments to infrastructure from defined-benefit investors are likely to see significant growth over the next three years with 65 percent of respondents revealed plans to include medium-term infrastructure asset allocations in their portfolios over the next three years, according to a new report. The figure stood at 20 percent in 2013.

Thirteen percent of respondents indicated that they would look to infrastructure for short-term opportunities.

The report is the seventh in an annual series produced by Professor Amin Rajan of CREATE Research and sponsored by Principal Global Investors. According to Rajan, the report covers activity in 29 fund jurisdictions with 705 participant institutions covering the pension plan, sovereign wealth fund, asset manager, pension consultant and fund buyers worlds. The respondents to the survey represent a combined $26.8 trillion in assets under management.

The central theme of the report focuses on whether the “cult of equities is dying, as widely reported after two punishing bear markets in the last decade”, a debate that the report indicates has “generated more heat than light”.

While the report noted that “investors chase returns, not asset classes”, interest in the infrastructure asset class has increased significantly over the past two years. Part of this could be explained by what the report calls the “bondification of equities”, or the search for stocks with good dividends, less debt, strong pricing power, free cash flow and a high return on equity, since many infrastructure investments fit into this profile.

The data provided by the report indicates that defined benefit investors will target quality global equities for market upside, low-variance equities for low volatility, real assets for capital growth and regular income, sovereign bonds for downside protection, and alternative credit for high yield.

At the same time that investors seek to increase exposure to infrastructure and other real assets, bond and emerging market equities and bonds have fallen out of favour with investors. Level of appetite for emerging market government bonds declined to 33 percent from 45 percent, emerging market hard currency bonds to 38 percent from 46 percent, emerging market equities to 45 percent from 52 percent, and emerging market local currency bonds to 18 percent from 25 percent.

One UK pension plan respondent reported that his plan's funding level has been driven down to 78 percent due to falling interest rates “with worse to come” as quantitative easing in the Eurozone gathers momentum, and noted that his pension will no longer be relying on a strategic asset allocation approach, which no longer functions “in an environment where assets are so mispriced and risks are so unpredictable”.

Julie Lawler, senior executive director of Principal Portfolio Strategies, an asset allocation boutique of Principal Global Investors, said the report's findings indicate that “more than ever, asset allocation is an important strategy across all investor groups”.