The global trend of increasing allocations to ‘real assets’ will continue, if the results of a Frontier Advisors study tour prove correct. However, big pension funds overseas may be less concerned about liquidity than Australian super funds – to their benefit and our detriment.
After a trip to the UK, Canada and the US by three senior Frontier consultants in July, the consulting firm published a report last week. It was based on meetings with five North American pension funds and 35 managers of real assets. The consultants were: Tim Stringer, Gilly Zimmer and Tom Frederick.
The report said: “Current target allocations to real assets vary across the investors we met with and range from 6 per cent to 45 per cent, where typically the more experienced investors (up to 20 years of experience) have the larger target allocations.
“What was consistent among investors – regardless of existing allocation, funds under management or fund growth – however, was a clear trend of looking to increase their allocations to real assets over time. One investor is now cash flow negative but is aiming to materially increase its allocation to real assets over the short to medium term.
“The investors are generally not too concerned about liquidity, and are tackling the illiquidity issues of the asset class through a larger allocation to cash and having a very good knowledge of the secondary market.”
In Australia, the regulator, APRA, has been controversially pushing super funds to consider liquidity in their allocations more than their natural risk/return profiles and member demographics would indicate they should.
In terms of the value of various sectors within real assets, the report noted that demand had pushed prices up and this was likely to continue. All investors agreed core real assets were highly competitive and “very expensive”.
It said: “Within the infrastructure sector, the consensus view is that pricing is likely to increase further (as the unofficial 9-10 per cent required return threshold that many investors benchmark against – directly or loosely – has been breached), and that equity returns will continue to compress.
“In the property sector, prime assets in the top markets are transacting at extremely tight yields – Lend Lease’s 30 per cent stake in Bluewater, a prime retail shopping centre in the UK, was sold on a yield of approximately 3.85 per cent to Hammerson.
“On the debt side, investors are looking to take advantage of the current liquid environment to lower debt costs and extend maturities where possible but are very wary of rising interest rates and as such not looking to over extend assets.”
In response to market pricing, there is a clear trend of investors broadening their views on portfolio construction, including core-plus strategies and some non-traditional sectors, in some cases moving up the risk curve with managers expert and experienced in these markets and asset classes, the report said.
“In the infrastructure sector, greenfield investments and emerging markets are being considered, while some have already made the charge into select markets such as Latin America (Peru and Chile) and the Czech Republic. Although investors are talking up the opportunity set in Asia, particularly in China and India, few have made the bold move and for those that have, the capital deployed to date has been minimal…”
View the full report.