Infrastructure investment boost expected from global pension and sovereign funds

Up to 70% of global public sector investors plan to increase their infrastructure investments over the next 12-24 months, according to a new survey from BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF). The survey covered sovereign and public pension funds with combined assets under management exceeding US$4.6tn.

The planned increase in infrastructure is the highest figure for all asset classes, but from a relatively low base. Real estate is the next most popular asset class, with 32% of respondents planning to increase their allocation. This could amount to an additional US$334bn investment in real estate and US$130bn in infrastructure over the next two years.

The current sovereign fund portfolio contains, on average, 8% real estate and 11% infrastructure, against 9.4% and 2%, respectively, for pension funds. Public pension funds are planning the highest increase in infrastructure investment over the next two years.

Hani Kablawi, Chief Executive Officer of Global Asset Servicing and Chairman of Europe, the Middle East and Africa, BNY Mellon, said: “The appeal of real assets to public investors stem from their low correlation to stocks and other investments, combined with yields that have exceeded most traditional assets over five, 10- and 20-year horizons. Central bank policies, demographic shifts – the growth of the middle class, impact of millennials and urbanisation – and the outperformance of real assets have created a surge of interest and investment.”

The findings, reported in Real Momentum: Global Public Investors and the Real Assets Market, are based on a survey of institutions representing more than 20% of the US$21.5tn held by sovereign and pension funds globally.

These investors have increased their holdings of real estate by 120% and infrastructure investments by 165% since 2009, in response to a combination of factors including expansionary monetary policies and low yields on traditional asset classes.

Hani Kablawi said: “Our 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.”

Some 82% of investors said that they do not plan to exit their real investments as monetary policy normalises and yields rise on traditional assets. However, difficulties highlighted by respondents, including a lack of suitable projects and high costs associated with investment, present obstacles to this growth. Some investors are moving into more niche assets and new locations in response to rising valuations on core assets.

In the light of these factors, asset managers face added pressure to demonstrate their value. Increased flexibility and transparency are vital, as is an ability to navigate the more complex investment climate.

David Marsh, OMFIF Chairman, said: “The survey points to inescapable interest in real investments by this very important group of public investors. In view of these institutions’ duties of stewardship and accountability towards parliaments, taxpayers and pensioners, we would favour efforts to harmonise regulatory coverage of this asset class, optimise valuation methodology and where possible add liquidity to the sector so that markets can perform their task efficiently and effectively.”

Alan Flanagan, Managing Director, Global Head of Private Markets, BNY Mellon Alternative Investment Services, said: “Investment managers have to adapt to a world where the investor is driving the agenda and competition for allocations is forcing price compression. All investors – both public and institutional – are demanding more for less.”

 

To access the full report, please click here.