Public sector investors plan to increase infrastructure exposure: survey

By Claire Milhench

LONDON (Reuters) – Nearly 70 percent of public sector investors plan to raise their exposure to infrastructure over the next 1-2 years, equating to potentially an extra $130 billion invested, a survey showed on Monday.

The survey by the Official Monetary and Financial Institutions Forum (OMFIF) and BNY Mellon polled sovereign wealth funds and public pension funds with combined assets under management of almost $4.6 trillion.

That is about 20 percent of the $22.9 trillion held by sovereign and pension funds globally.

The planned increase in infrastructure was the highest for all asset classes, although it reflects a low base for pension funds.

The current pension fund portfolio on average has just 2 percent invested in infrastructure and 9.4 percent in real estate. In comparison, sovereign funds have on average 11 percent in infrastructure and 8 percent in real estate.

Some 32 percent of survey participants plan to raise their real estate allocation over the next 12-24 months. This equates to an additional $334 billion potentially invested in property over the next two years.

The findings were published in a report examining the market for real assets and public investor appetite.

The inclusion of more real assets in public sector investor portfolios is a medium-term trend driven by low or negative yields in government bonds. Fixed income still accounts for 38 percent of pension fund portfolios on average, compared with 25 percent for sovereign funds.

Infrastructure and real estate are an appealing alternative because they can deliver steady long-term, inflation-linked income streams.

However, competition for assets has driven down returns in some segments and sourcing suitable projects can present problems. Some 40 percent of survey respondents cited this as the biggest obstacle to investing in real assets, with 20 percent citing high costs.

As a result some investors are moving into more niche areas and new locations, the report noted, such as industrial, logistics and development projects.

“The survey suggests that sovereign funds and public pension funds remain committed to real assets for the foreseeable future, with some respondents indicating a market downturn would create an opportunity to increase their holdings,” said Hani Kablawi, chief executive of global asset servicing and chairman of EMEA at BNY Mellon.

Some 82 percent of investors said they do not plan to exit their real asset investments as monetary policy normalizes and yields rise on traditional assets, suggesting the shift is here to stay, the report noted.

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