13/9/2010
By Kalpana Fitzpatrick
European pension funds are making greater use of unlisted infrastructure in a bid to tackle risk within their scheme portfolios, according to First State Investments.
The asset manager said the need to adopt a more robust risk framework had become a high priority for pension funds in today’s economic environment.
Danny Latham, European head of infrastructure investment management at First State, said: “Institutional investors have had to rethink their portfolio allocation strategies since the global credit crisis, which saw the fluctuations of hitherto uncorrelated asset classes becoming almost synchronised.”
Latham said funds had to take into consideration quantitative factors in addition to traditional measures of return, volatility and correlation.
He added that schemes were increasingly grouping investments by their risk and return profiles across different economic conditions rather than traditional asset classes as was the case in the past, and described investors’ definition of risk as “multi-dimensional”.
“As pension funds moved towards more sophisticated methods of risk measurement and a greater focus on absolute return and asset-liability matching strategies, unlisted infrastructure has gradually started to assume a more important role in pension fund portfolios.”
Latham said although there were similarities between property and infrastructure, there were significant differences that warranted separate allocations.
“Our analysis showed that unlisted infrastructure would have preserved capital over the past 10 years better than equities, unlisted property, REITs and listed infrastructure,” he said.
Commenting on the UK market, law firm Sackers & Partners said that although there was a flurry of activity in infrastructure investing, particularly amongst the UK local authorities, trustees should be mindful of the restrictions in the sector.
Andrew Bradshaw, partner, said that although there were no legal bars for local government schemes investing in infrastructure, local authorities should make sure they do not breach legislation governing their pension funds.
“For example, there are limits on the amount that local government pension schemes can invest in certain types of investment. Schemes may follow the private sector and invest in infrastructure funds structured as limited liability partnerships or could hold council owned assets as direct investments – but they need to ensure they do not breach the limits,” he commented.
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