Historically, infrastructure has been the domain of larger pension plans, but, as more infrastructure vehicles become available, the asset class has increasingly been attracting the interest of smaller plans, too.
“Infrastructure can be a good asset class for those looking to step between equities and bonds,” said Todd Nelson, senior investment consultant with Towers Watson, speaking at Benefits Canada’s 2015 Benefits & Pension Summit. Infrastructure volatility is lower than equity volatility, but the returns it brings are higher than traditional bond returns, he explained.
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“A lot of the discussion gets hung up on vehicles; people overlook the [infrastructure] types,” Nelson said. But, he explained, investors need to consider both types and vehicles when accessing the asset class.
Types
Infrastructure types fall into three categories—core, opportunistic and debt.
Core infrastructure includes steady, predictable projects. “That’s what most people think of when they hear infrastructure,” Nelson said. Core infrastructure is a good choice for an investor that has only one shot at the asset class, he explained.
Opportunistic infrastructure includes assets where managers are trying to create value through active management and operational improvements. It comes with higher risk and higher returns. Opportunistic assets are a good match for pension plans looking to diversify their infrastructure exposure, Nelson explained.
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Infrastructure debt—which tends to come with long maturities and returns of about 6%-7%—also offers opportunities for diversification, said Philip Robson, president of Integrated Asset Management Corp., speaking at the same event.
“You will get access to infrastructure assets that not everybody looks at,” Robson said of infrastructure debt.
Vehicles
The number of infrastructure vehicles available to investors has increased in recent years, Nelson said. These include open-end funds, closed-end funds and direct investment.
Open-end funds, which can be listed and unlisted, are perpetual funds constantly raising capital. “They will give you greater liquidity and the ability to move in and out of the asset class,” Nelson said.
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With closed-end funds, the investor commits money for a set period of time.
They are illiquid vehicles. If you do need to sell, you can do it on the secondary market, but for the most part, your assets are committed for the life of the fund, Nelson explained.
Direct investments are mainly the domain of the mega pension plans. They tend to be a cost-effective way to access the class because you avoid the management fees, Nelson explained.
All the articles from the event can be found in our special section: 2015 Benefits & Pension Summit Coverage.