USS Investment Management – Interview
ping centers. How has that portfolio been affected by the pandemic? Certain sectors have struggled. Anything to do with transport has had a difficult time, but other investments have done what you hoped they would because they are an essential part of daily life. For example, we are invested in Thames Water, a business that needs a lot of investment to improve the quality of its pipes to reduce leakage. It is a business we are committed to.
There is also the broadband roll-out in London, which we invested in at the end of 2020. That is about building fresh infrastructure.
There is a huge variety within the general label of infrastructure, some of which has obviously struggled, such as transport, but we expect to see a significant recovery. We also see significant opportunities for growth within infrastructure, areas that are an essential part of life. Diversification is important to us. We are not going to get every investment right. What we need to make sure is that the over- all portfolio can deliver the cashflows to pay our members’ pensions as they fall due.
Are you planning any changes to your infrastructure allocation going forward based on the strategic changes you mentioned? Where we see an attractive opportunity, we will invest. If we do not see an attrac- tive opportunity, we will not.
Investments that have a good chance of returns being linked to inflation are attractive because the pensions we pay to our members are linked to inflation. Investments with strong linkages to infla- tion are attractive, either contractual and explicit through, for example, contractual income being paid by utilities or rental income explicitly linked to inflation. We are looking out for those.
Is this an attempt to hedge the potential risk of price changes? Yes, especially because inflation means
the amount we pay our pensioners goes up. So, in that environment we would want to see the value of our investments go up too.
An example of an investment we made last year was buying a 50% share in a long-term sale and leaseback deal for BP’s forecourt business. That is backed by an inflation-linked rental agreement with BP, so as inflation rises so does the rent we collect. Incidentally, that allows BP to recycle the cash we paid them to decar- bonise their business. That is an example of an open investment that has explicit inflation linkage.
We have talked about your ESG stance in equities, but are you also using your position in infrastructure to engage on issues such as climate change? Very much so. Arguably, much more so. Take for example our investment in Heathrow. We have a board seat, so we directly influence the running of the busi- ness. For instance, they have not only made a pledge but achieved a net zero car- bon performance for their ground opera- tions. That was something we worked closely with Heathrow’s management to
If investors refuse to buy corporate bonds based on the company’s sustainability credentials, that potentially creates a huge problem.
change the way the business operates. So, as a major infrastructure investor, you have significantly more influence as a pri- vate owner of a business than merely investing in publicly listed equities, where you cannot have a board seat. We have a much greater ability to influence from a climate change perspective as a private owner of assets.
So, that is the argument for pension funds to invest in infrastructure? As a long-term investor, we have the incentive to make long-term decisions and encourage the business to operate in a long-term way. Whereas often in the public markets, management is thinking about their next annual report. As a result, decision making for many corporates is probably too short term. But, as somebody who is going to invest in the business for the next 10 to 20 years, we can influence management to think about their long-term interests and society’s long-term interests because the two are heavily intertwined.
What is your outlook for the global economy? I hope we can have conversations face-to- face before long. I am encouraged by the rollout of vaccines that appear to have a significant impact on the way society can operate again. But equally, it looks like there will be some fundamental changes in the way we all operate and live. There will be greater flexibility in how we do our jobs and greater empowerment. But we are also going to see some legacy scarring. The level of global debt has increased and is not going to reduce quickly. That is likely to result in lower interest rates for longer and weaker returns for investors for a prolonged period. It is not all sunlit uplands. We are going to be in a period that is challenging for society and financial markets, as we deal with the long-term structural implica- tions of this pandemic.
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