How much risk comes with real asset investing?

Vassos Vassou: A lot of us have consultants and other firms that advise us as trustees. We do a lot of modelling around this and they will make assumptions about risk and volatility in their modelling for the different asset classes.

Perhaps we should not be delving into that level of detail as trustees, but I would be curious to know what they assume about infrastructure for the purpose of their modelling, although I suspect quite a few of them do not have infrastructure in there as a separate asset class when they are doing their modelling in the first place.

Danny Vassiliades: There are not enough data from the past for anyone to be completely confident in the risk-and-return characteristics of infrastructure held over a very long time. So a model is just a helpful guide as to what your total portfolio looks like if you add a bit of this and a bit of that to it.

A model is not the truth, it is a guide, so you cannot imbue it with precision when precision is not where it starts

Danny Vassiliades, Punter Southall Investment Consulting

What is more important is the qualitative analysis of what the risks are when you invest in a particular alternative, like property or infrastructure. So for property for example, I would be surprised if many of the models talk about modelling a liquidity risk or a fire sale, whereby you suddenly have to get out of property quite quickly and you are taking quite a large hit; I have never seen that in a model.

People are actually modelling long-term returns in volatility, not specific situational risks.

So it is important to understand, at the qualitative level, what those risks are, and bear those in mind in the context of what your modelling tool is telling you, because your modelling tool is not the truth, it is a guide. It is just another bit of information that helps you get to a decision.

Vassou: It paints a picture – effectively, it tells you a story. But it still does then heavily influence the decisions that are made, and so quite often the modelling is presented in a very complete way, as if to say that that is the answer, even though everybody understands it is not.

But even with that understanding, I still think a lot of trustee boards will follow a lot of the output that the model produces in terms of the decisions that they actually end up making.

Vassiliades: A model is not the truth, it is a guide, so you cannot imbue it with precision when precision is not where it starts.

Vassou: I know, but you do not have anything else, either.

Vassiliades: You have qualitative analysis and reasoning, and that is important too. If you go for a purely quant-based answer, you might not necessarily see the whole picture.

Gerald Wellesley: Understanding the underlying assets is important. So in respect of infrastructure versus property, if you are looking at infrastructure, an airport is going to have very different characteristics to a sewer or a bridge. And equally, property can be very different.

So you take a look at what you are looking for in the scheme and then understand what the risk-return liquidity trade-offs are. I would like to feel there is a bit more of a subjective view; maybe you can throw in likelihoods of liability-management exercises that might mean that you might need more liquidity than the original model told you.

Pensions Expert: Are there particular regulatory risks that infrastructure is exposed to?

Anish Butani: Regulatory and political risks are inherent features of investing in infrastructure assets, especially given that so many assets hold a monopoly-type position and are of national strategic importance.

As we can see at the moment, political risk is very much on the menu, so it will be interesting to see how investors weigh up political risk when investing in the UK. Hopefully it is just a temporary phenomenon and policymakers will ensure the UK still remains an attractive place for institutional investors to invest their funds.

Wellesley: One of the new things that might come out is building an infrastructure for charging electric cars, for example, because there is a natural revenue stream off the back of that. I have not seen any deals like that, but there are things in the offing that might have characteristics that would be interesting as well.

I do not think the regulatory issue is one that you can avoid

Barry Fowler, Aviva Investors

Barry Fowler: I do not think the regulatory issue is one that you can avoid, and I do not think you can avoid it in any country either, so it is not as if it is a unique problem in the UK. It is something that is universal, so we have to trust in the government doing something sensible here.

If you have invested in infrastructure subject to underlying subsidies being payable then you may consider that to be more vulnerable, but there is good case law that would support that actually those subsidies should be payable in all situations and circumstances.

Is property any more or less vulnerable because you bring in new regulations around the efficiency of the building, for example? We are seeing some of those regulations coming in now and an inability to release a property that is below a certain threshold in terms of efficiency from next year or the year after; it is starting to change across all the sectors, or perhaps continuing to change across all the sectors.

Vassou: That is one of the risks you take into account with that particular asset class. All asset classes have their risks, and this is where all the total risks relating to direct investment in infrastructure may be too much to bear as a trustee relative to investing in more traditional asset classes, such as corporate bonds.

Fowler: We invest in the capital stack because if you can choose to go in at the debt level, as opposed to the equity level, that will give you an inherent cushion, so there should be a level of protection and that should increase the certainty of the cash flows available as well.