17/10/2011
By Matt Ritchie
Understanding of infrastructure as an asset class has increased markedly in recent years and Europe is offering some appealing opportunities in the area, a European Pensions roundtable has revealed.
An expert panel of speakers chaired by Towers Watson senior investment consultant Duncan Hale has covered off the current state of play in the infrastructure space, and offered views on likely future developments for the asset class.
Head of infrastructure asset management Europe at First State Investments Niall Mills said that the company’s clients had hugely increased their knowledge of the nuances of the asset class over the last two years.
“The benefit of this is that you can have very meaningful, knowledgeable conversations and really understand the assets and their relative performance.”
Partner at EISER Infrastructure Jaime Hector added that there has been a “clear trend” towards separate treatment for the different types of risk within the sector, such as setting minimum targets for assets largely not exposed to demand and price risk, and caps for the GDP linked assets.
“Basically, investors are smartening up to these different kinds of risks,” he said.
Head of infracapital at M&G Investments Martin Lennon said inflation remains one of the big issues very relevant to most investors today, which encourages managers thinking about offering an infrastructure product to have some focus on inflation-linked assets where possible.
“I think the days of debating if infrastructure is equity investing or a bond substitute are probably largely consigned to history now because there is an understanding that what infrastructure funds invest in (other than specific debt funds) is an equity instrument, even if it's in a highly contracted PPP, it's still equity. I think that we have definitely seen the market mature in terms of thinking about infrastructure in this regard.”
On the opportunities available in the sector, associate manager research at Mercer Amarik Ubhi said a number of factors were creating opportunities in Europe at present. In particular, government indebtedness and climate change policy were creating a need for private sector capital in infrastructure development.
Managing director and global head of asset management, infrastructure group, at J.P. Morgan Asset Management Surinder Toor said that opportunities in the United States have “over promised”.
“You hear about the infrastructure initiatives, you hear Obama wants to move it out of public sector and general taxation, but if you were picking between Europe and the US you would still think the European opportunities would probably be a better set and then further afield Australia commodities related infrastructure and transportation assets seems very positive still but there is a lot of completion
for assets.”
Meanwhile, director of index research at FTSE Group Mike Bruno said that over the past five years volatility across the core infrastructure indices has been much lower than global equity indices, and returns “much better”.
“We wouldn't say that's predictive, but one can only hope that will continue into the future. Certainly we have found that a correlation between our infrastructure indices and the broader equities has been very high. You would naturally assume that because one is the sub-set of the other there would be strong correlations but in this market they would be stronger than usual, we hope of course that they return to some long-run average where they diverge a bit more but that remains to be seen,” Bruno said.
Read the full discussion in the latest edition of European Pensions, or access it online here
Other stories you may find of interest:
European investors expect EU inflation to remain
Inflation in the Eurozone will be well above 2% in five years’ time, according to 36% of 52 large European institutional investors surveyed by ING Investment Management
Inflation worrying European pension funds
European pension funds are more concerned about inflation than they were last year, and many are taking steps to protect their assets, according to a survey by consultancy firm Mercer
China outlook 2011
In 2011, the biggest opportunity for the economy is if China changes legislation in order to allow land ownership licenses to be traded, said Chris Ruffle, portfolio manager at Martin Currie
