SWFs and pension funds eye higher real asset allocations

Infrastructure and real estate are the two asset classes most likely to receive increased allocations from sovereign wealth funds and pension funds globally over the next two years, a comprehensive new annual study shows.

That conforms with other evidence in Asia, although turning such allocation wishes into reality can sometimes be a challenge.

Published on Wednesday by the Official Monetary and Financial Institutions Forum (OMFIF), the Global Public Investor 2018 report surveyed 750 sovereign wealth funds, public pension funds, and central banks, including 118 in the Asia-Pacific region. Asian public investors accounted for 38% of the total assets covered, with $13 trillion in assets under management (AUM) -- up 7% on the previous year.

According to the OMFIF report, 70% of those surveyed globally plan to increase or significantly increase their infrastructure investments in the next 12 to 24 months. No participants said they planned to decrease investments in this area.

“This is a trend that has been going on for quite some time,” Garry Hawker, Mercer’s Asia wealth business coordinator and growth markets director of strategic research, said.

AsianInvestor’s recent Asian infrastructure poll also shows investors are generally positive about the prospects for infrastructure.

Despite concerns over high valuations on established assets, most public investors in Asia prefer to take their exposure in brownfield-type investments, as well as developed market projects, rather than take on the extra risk of funding greenfield investments in Asia, Hawker said.

For example, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, issued its first infrastructure mandate in January, focusing mainly on developed markets.   

However, even if Asian public investors are keen on infrastructure plays, a further obstacle is finding viable investment opportunities.

“The challenge that many of the organisations have is the demand for those investments is not necessarily matched in the supply, and therefore its having some impact on pricing,” Hawker said.

As a result, even if public investors plan to increase their allocations to infrastructure, actually achieving their target allocation will be a challenge for some funds, he said.

REAL ESTATE

Real estate was the second-most popular asset class for global public investors after infrastructure, with 45% of those surveyed by OMFIF planning to increase or significantly increase their asset allocations over the next 12 to 24 months and 12% planning to cut their real estate allocations.

Asian public investors, particularly public pension funds, have been investing in real estate since the global financial crisis, but it's still an area of growth, Hawker said.

“A lot of the risk-return profiles for many of these institutions has been more in the developed world, but we are seeing some interest in other areas, like China,” he added.

Malaysia’s Employees Provident Fund (EPF), for example, said in April that they were interested in increasing their exposure to North Asia primarily through real estate. Also, Philippines pension fund Government Service Insurance System (GSIS) issued an $800 million global multi-asset strategy request for proposals in November 2017 that included real estate as one of the asset classes.

Total real estate-related assets held by Asian public pension funds increased from $2.6 billion in 2016 to $3.0 billion in 2017, an increase of 18.6%, according to Preqin data. Real estate-related assets under Asian sovereign wealth funds increased by 13.0% in the same time period, growing from $2.9 billion in 2016 to $3.3 billion in 2017.

That said, real estate investing has many of the same challenges as infrastructure, Hawker said.

“I think some funds are probably under-invested across both of those areas simply because they haven’t got a match between their internal resources relative to what they’re trying to do in that segment,” he said.

Some institutions may want to allocate an extra 5% to their real estate allocation, for example, without realising that it comes with a commensurately high increase in terms of resources allocated to do it, especially in direct investments, Hawker said.

“It’s not quite a scalable business as the public market space is,” he said.