Follow Australia for higher infrastructure allocations

In markets that have seen investment classes buffeted and revalued, infrastructure continues to demonstrate two key qualities: excellent diversification and long-term, inflation-linked cash flows.

The essential nature of infrastructure assets such as water, gas and electricity utilities, as well as hospitals and airports, is reflected in their typically dominant market position.

This is added to their importance to communities that use their services regardless of economic conditions, and the long-term revenues that in most cases ratchet up with inflation.

What makes infrastructure that much more attractive as an investment is the security of the underlying cash flows.

Constructing a benchmark

For pension funds, the real advantage infrastructure offers is the combination of these essential features, and the benefit it offers as a defensive and predictable long-term matching investment for pension liabilities.

 In the absence of an accepted global benchmark standard for directly held infrastructure assets, managers of infrastructure investments adopt a range of benchmark proxies.

These can include inflation-plus benchmarks, absolute return approaches and benchmarks based on long-term bonds.

In this case, the use of the long-term gilt yield – 10 years is used here – matches the average, long-term expectation for the returns that would be generated by direct infrastructure assets.

With asset lives that can run from 20 to 100 years or more, infrastructure provides a compelling, longer-term alternative to bond-based liability-matching.

It can also reduce reliance on the listed equities markets to deliver outcomes for pension fund portfolios.

You may find infrastructure offers more for your pension fund needs than is represented in your current allocation

Pension and life offices seeking matching benefits from infrastructure can shape portfolios within a wide spectrum of risk and performance profiles.

In Australia, where many superannuation funds have been investing in infrastructure for more than 15 years, a typical allocation may be between 5 per cent and 12 per cent.

By contrast, across Europe, it is generally below 5 per cent of a pension scheme's total assets.

The matching benefits of infrastructure for pension funds and life offices – and the long-term nature of these investors – would suggest significantly higher allocations can be justified.

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It is time for pension fund and life office investment managers to take a closer look at the benefits infrastructure can offer their portfolios.

There are three simple steps for any pension scheme considering this investment:

1. Gain knowledge. Engage with established infrastructure managers and investors on how the assets work. Explore the case for adding them your portfolio, taking into account your fund's actual needs and risk preferences.

2. Evaluate your strategy and positions. Ask yourself: Why do you hold some or no infrastructure? Could it give you yield, diversification, matching benefits or a mix of all these?

3. Take an active and open approach. Just because infrastructure is still considered an alternative asset class it does not mean it should be an alternative in your portfolio. You may find infrastructure offers more for your pension fund needs than is represented in your current allocation to the sector.

Richard Shields is managing director, UK and Europe, at AMP Capital