Feature | Real assets
Many of the first investments made by pen- sion funds through history were likely to have been in real assets. Romans, who first issued annuities to retir- ing centurions, are likely to have used the returns or profits on their investments in roads, viaducts and the range of other infra- structure for which they are famous, to meet their liabilities. For today’s pension funds, the story is com- ing full circle. After a century or so of dab- bling in the stock markets, with varying degrees of success, investors have returned to real assets with gusto. BlackRock’s institutional investor survey, published in February, showed a significant portion of institutions controlling around $7trn in assets intend to increase their exposure to real assets (+54%) and real estate (+40%). This, the world’s largest asset manager said, “continues a multi-year structural trend of clients re-allocating risk in search of uncorrelated sources of return”.
Aside from public pension funds, which are mostly still open to new members and future accrual, more mature corporate schemes around the globe also planned to increase illiquid investments, BlackRock said. Some 47% reported wanting to increase real asset holdings and 35% sought to boost real estate exposure “to bolster their growth portfolios”.
Defined contribution (DC) savers, too, are being enticed towards these asset classes that historically have been seen as unsuita- ble, as the UK government – among others – have noted how useful this “patient capi- tal” can be. Illiquidity, once something feared by insti- tutional investors, has become something increasingly looked upon favourably for the premium it can offer. But while there is an undeniable shift, unlike our ancestral investors, pension funds today have a good deal more to mull over before diving into an illiquid investment.
OLD WINE, NEW HEADACHES Bob Collie, head of research at Wills Towers Watson’s (WTW) Thinking Ahead Group,
has been advising pension investors since the mid-1980s on how to grow their capital to meet liabilities. He has seen investors buying into various types of infrastructure assets over the past 10 years and testing how they work on a buy/sell/operate basis. He has seen the asset class grow from a niche area to “an increasing part of the opportunity set for large investors”. “Infrastructure is one way of doing it as there is a huge infrastructure need in Europe, the US, emerging and other devel- oped markets,” Collie adds.
The array of assets on the market is consid- erable and governments around the world, who might usually have been liable for funding their construction and mainte- nance, are increasingly at ease with letting someone else foot the bill. “However, these assets need to be consid- ered using a different scale,” Collie says. “Investors need to look beyond just the return profile and break out from the two- dimensional mindset many have been trained to take.” Rather than just plotting out the potential purchase and selling price, and how long a security might take to sell, investors need to take a more holistic view.
“There are political risks to consider around governments, for example,” Collie
says.
“These assets are multi-dimensional. They are still attractive, but require proper and skilled analysis, taking in a wide range of factors before committing.” Kevin Wade, chief investment officer at SAUL Trustee, has seen more investors – and those offering them products and funds – moving into infrastructure and other real assets over the past 10 years. The SAUL scheme, which has more than £3.3bn in assets and is still open to new members, had just over £100m in pooled vehicles that invested in infrastructure as of March 2018, with a further £114m in real estate, according to its annual report. Wade and his team are well aware of the wide range of risks associated with real assets that may not come into play with listed instruments. “We stick to developed markets, partially due to political and government risk,”
32 | portfolio institutional | May–June 2019 | issue 84
Wade says. “But we are also aware of the risks closer to home, due to the announce- ments by the Labour party about renation- alisation of key national infrastructure.” For Collie, the institutional investors that made up the first wave of allocations were typically very large and well resourced. “There is a danger that the second wave may see their success and jump in without the same recognition of the uncertainty and demands,” he says.
STRIPPING IT BACK For Richard J Tomlinson, deputy chief investment officer of Local Pension Part- nership (LPP), there is an additional risk many investors are not appreciating, and one that has been exacerbated by the shift in institutional portfolios to illiquid assets and the fall out of the financial crisis. His concern is about liquidity risk and the multiple layers of this liquidity in financial markets that are going to be important over the next few years. “Public markets have evolved, and the pro- vision of liquidity has changed in the short term,” Tomlinson says. “Now the banks, which used to be the primary suppliers of market making capital, because of the reg- ulation after the crisis have largely gone.” Under the Volker Rules, implemented after the financial crisis with the intention to make markets safer, banks were made to close down proprietary trading desks. These desks, along with carrying out other functions, would provide underlying liquidity in markets and often trade securi- ties other participants would not touch. Add this to a decade of quantitative easing from the world’s central banks using up most of their firepower to keep markets and economies afloat, and Tomlinson fears markets may be entering a new liquidity crisis. Above all, he is concerned those run- ning risk management programmes are failing to address the issue.
“It changes the liquidity profile of markets (and investors’ portfolios) dramatically,” Tomlinson says. “As liquidity dries up, at a portfolio level, will institutional investors get caught? There are different risks that come into play by investing in illiquid
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
