Warwickshire targets yield with infra double play

Persistent low yields have forced many pension schemes to cast their nets wider across alternative asset classes.

Data from FT service MandateWire showed property and private equity were the most popular alternatives in Q1 among European institutional investors, receiving net inflows of £3.5bn and £2.9bn, respectively. Infrastructure was the third most popular asset class, with inflows of £476.8m (see graph).

In January, the London Pensions Fund Authority announced a £500m deal with Greater Manchester Pension Fund to invest in UK infrastructure projects over the next three to four years. And London Borough of Havering Pension Fund has also announced plans for an £11m infrastructure investment.

There were 13 expressions of interest from pension schemes on the hunt for infrastructure, largely from local authority schemes, according to the data.

Exemplifying the growing trend for the asset class, Warwickshire Pension Fund committed £55m to two infrastructure investments last year, valued at just less than 4 per cent of the fund.

The local authority scheme secured a £20m deal with a single manager and will gain exposure to around eight core infrastructure projects, including transport and utilities, across the UK and Europe over a 12-year contract.

Warwickshire also targeted a “global play” through a 12-year £35m pooled investment, with a target annual return of 8-12 per cent.

Matthew Dawson, Warwickshire’s treasury and pension fund manager, said the fund aimed to capitalise on the low volatility of the asset class to access predictable returns over the long term.

“What a lot of infrastructure funds do is they offer you knowable returns with a bit of built-in inflation protection,” he said. “Funds are doing this as a fixed income-plus.”

Dawson said splitting the allocation between a single manager and a fund of funds was driven by a desire to diversify across the opportunities available at the time.

He said: “You need a basket of assets that do different things.”

However, Guy Hopgood, consultant and head of alternatives research at consultancy JLT Employee Benefits, said despite growing interest among UK pensions schemes, investment into the asset class was a “slow burn” and lagged far behind infrastructure investment in the US and Australia.

“At this point in time the allocations are still fairly small, 5 or 6 [per cent] from some schemes,” said Hopgood.

“As the market in the UK evolves and pension schemes become more aware, based on their long-term liabilities they are some of the best investors to reap the rewards of the illiquidity premium on offer.”

Hopgood said local government schemes on the verge of becoming cash flow negative could benefit from the long-term predictable yields offered by the asset class.

“How are they going to start paying pensioners going forward? Either they’re going to have to sell assets they’ve got to meet those payments or they’re going to require [greater yield on] current assets,” he said.

Growing opportunities

According to consultancy Mercer’s ‘2015 Themes and Opportunities’ paper, released in January, long-term investors should aim to capitalise on the illiquidity premium of opportunities restricted to investors with a longer time horizon.

It also urged investors to assess the relative value of areas of the market in need of capital and how these assets might fit within their broader investment strategy.

According to the 2014 National Infrastructure Plan from the Treasury, there is significant capacity for infrastructure investment in the UK.

The plan values the current UK pipeline at £466bn of which £277bn is currently under construction.

David Curtis, head of UK institutional business at Goldman Sachs Asset Management, said infrastructure offered schemes a reasonably low level of volatility when compared with equities and listed property, the ability to provide a regular income and inflation linkage.

“The characteristics of infrastructure companies are very appealing for pension schemes,” said Curtis. “A core distribution [and] existing projects that are robust businesses provide a high level of security and returns for clients.”