ANCHORAGE — At a time when states and municipalities face more than $2 trillion of unfunded pension fund liabilities, states are increasingly turning to private infrastructure investments to help close those funding gaps, an investment banker told treasurers meeting here this week.
All institutional investors in North America — including public pension plans, endowments, sovereign wealth funds and foundations — are expected to increase their investment allocations for infrastructure by 32%, to 5.7% from 4.3% of their portfolios over the next two to three years, said Mark Weisdorf, chief executive and managing director of global real assets infrastructure investments at JPMorgan Asset Management.
He made his comments on a panel titled “Pension Investing Meets Infrastructure Needs” at the National Association of State Treasurers’ annual conference. North Carolina Treasurer Janet Cowell moderated the panel. In the next decade, real assets will move from an alternative to a mainstream asset class, according to Weisdorf. JPMorgan forecasts that over the next 10 years U.S. pension plans will increase their investment allocations for infrastructure to between 5% and 10% of their portfolios on average, he said.
“This will result in trillions of dollars of U.S. pension capital becoming available to add to the trillions of dollars of non-U.S. pension plan capital and sovereign wealth capital that is available to invest in U.S. infrastructure,” he told the treasurers.
Real assets are characterized typically by investments in tangible “hard” assets that offer stable income, equity-like upside potential, inflation hedging and lower volatility, he said. Real estate, infrastructure, shipping, commodities, timber, farm land and natural resources can be classified as real assets. “The key attractive benefits are relatively predictable, low-volatility growing cash flows,” Weisdorf told The Bond Buyer. “Compare that to fixed income.”
In general, global real assets can provide higher income than bonds and superior risk-adjusted returns to equities, and will increase in size and importance in investor portfolios, particularly public pension plans. It’s compelling to invest in infrastructure now because it has the potential to earn anywhere between a 9% and 12% rate of return, Weisdorf said. “When your actual required rate of return is 8%, why wouldn’t you do it?” he added.
States and localities have only begun to invest in private infrastructure in the last seven years. U.S. pension portfolio allocations to infrastructure average less than 0.5%, while allocations to the real estate sector average 7% to 8% across all plans, Weisdorf said. “So the message is, this is going to change,” Weisdorf said, emphasizing that this is another item in the toolkit for states to use, but not a panacea.
Washington Treasurer Jim McIntire, one of the panelists, said his state is “pretty picky” when it comes to its pension plan investments. Washington began researching infrastructure investment in 2005 and made its first commitment in 2007.
McIntire said his state typically is only interested in low-risk, long-term investments that will give them a stable cash flow and that is going to reflect a minimum rate of return of around 6% to 8%.
“We see this as a space where we can earn nice, stable low-risk, long-term steady returns,” he said. “As a pension fund, we like to actually own the assets as opposed to it being a concession.”
One of the goals of the tangible-asset portfolio is to own physical assets. So Washington tends not to pursue public-private partnerships because they often involve long-term leases, among other reasons. The state has allocated 5% of its pension investments for tangible assets, with infrastructure investments being part of the tangible-assets portfolio.
Infrastructure is not targeted but included in their 5% tangible-asset class, which is valued at about $500 million. It is divided almost equally between energy and sectors essential to society, which include roads, ports and parking.
“It certainly will be an option as other municipalities and other locations around the country are constrained in terms of their ability to finance,” McIntire said.