How GPIF’s infra mandate could herald others
The recent award of an infrastructure fund-of-funds mandate by Japan’s Government Pension Investment fund (GPIF) should encourage more pension funds to consider investing in infrastructure, but they may struggle to find appropriate opportunities to suit their risk profiles, believe investment experts.
GPIF, which is the world’s largest pension fund, announced on January 12 that it was appointing US-based Stepstone Infrastructure and Real Estate as the investment manager for its global infrastructure core strategy mandate—the first infrastructure mandate for the $1.3 trillion fund.
GPIF did not reveal the value of the mandate, which follows its request for proposal (RFP) for alternative assets issued on April 17, 2017. The RFP sought pitches from asset managers for a gatekeeper/fund-of-funds structure.
The mandate comes at a time when investor interest in infrastructure is bubbling up in the region. However, it remains a fairly new asset class for pension funds outside of Australia and New Zealand. They are typically conservative and prefer sticking to bonds and local equities, experts said.
Infrastructure assets appeal to these pension funds because the time horizon matches their liability structures, which can stretch to 30 years or so.
This fact was highlighted recently by Eddie Yu, deputy chief executive of the Hong Kong Monetary Authority: “For institutional investors awash with capital, such as insurance companies, sovereign funds and pension funds, the characteristics of infrastructure investment are very much in line with their own stable and long-term investment strategy,” he said, according to a note on the de facto central bank’s website, dated September 19, 2017.
Unique risks
Infrastructure funds typically offer stable returns and steady cash flows, usually because they are based upon long-term operating contracts that are provided by governments.
But the investments can also carry specific risks, including commercial viability, political and economic risks of different jurisdictions, as well as environmental and sustainability concerns.
“The challenge is finding commercially attractive investment opportunities that are aligned to the risk appetite of the pension fund,” Josef Pilger, global retirement and pensions leader at consultancy EY, told AsianInvestor.
As a result, many investors prefer developed-market opportunities, which provide more certainty in terms of counterparties honouring contract obligations—but also offer relatively lower returns.
“The infrastructure market in the US or Europe, for instance, is very developed, but there is also high competition from investors, and that puts pressure on yields,” added Sydney-based Pilger.
According to Mary Leung, CFA Institute's Asia-Pacific head of advocacy, total returns for listed equities in global infrastructure could range between 8% to 10% annually, while for unlisted/direct investments this can be in the double digits, commensurate the higher risks.
Typically even expert funds only have a few percentage points of allocation to infrastructure assets, as part of a broader portfolio in alternatives.
GPIF is focusing mainly on developed markets with its mandate, according to the RFP.
“Japanese institutional infrastructure investment appetite currently seems to reside mostly in the OECD brownfield space,” said Daisuke Imaeda, AMP Capital’s head of institutional business.
However, if GPIF were to become visibly more involved in the initiatives by Japanese infrastructure businesses, it would likely prompt Japanese asset owners to consider investing in these projects too, he told AsianInvestor.
Most experts that AsianInvestor spoke to pointed out that most institutional investors in the region are hoping to replicate the success of Canadian and Australian pension funds, which have been the pioneers—and successfully so—in infrastructure investing.
GPIF did not respond to a request for more detail about its new mandate.
In-built hurdle
Pension funds interested in gaining exposure to infrastructure investments often face some unique challenges.
In some instances, for example, a fund’s articles of association/ charter prevent them from investing in alternatives. Many such funds are state-linked, and they are seeking to update these rules.
“There is a huge push around the region among pension funds that can’t invest in alternatives to make changes to their charter to enable them to do so,” said EY’s Pilger.
Once those changes are made, investors, particularly in Japan, might leapfrog from investing in just cash and local bonds to alternatives such as private equity, real estate and infrastructure, noted Peter Douglas, Singapore-based principal with the Chartered Alternative Investment Analyst Association.
But even if a pension fund’s charter allows it invest in alternatives, not every one can do so. “Often the operational maturity of the fund is not aligned with the size or complexity of the investment opportunity,” pointed out EY’s Pilger.
A fund-of-funds, which is the format of the mandate announced by GPIF, usually provides a relative novice with more investing diversification, especially for investors still trying to understand the alternatives market.
“If you have $2 billion to invest, you could invest in one airport as a single irect investment, for instance, or you could invest in a portfolio of airport equities, which can help in geographical diversification,” CFA Institute's Leung told AsianInvestor.
On the downside, there are often two layers of fees to pay—for the FoF and the underlying funds it invests into. That can eat into returns.
AsianInvestor brings Japan's leading institutions together for its 7th Japan Institutional Investment Forum in Tokyo on March 15. To register or find out more, please visit the website.