Favourable macroeconomic, demographic forces and the outperformance of real assets are steering public sector investors to increase their infrastructure investments over the next couple of years, a survey has revealed.
The survey from BNY Mellon and the Official Monetary and Financial Institutions Forum (OMFIF), which covered sovereign and public pension funds with combined assets under management exceeding $4.6trn (€4.0trn), has shown that up to 70% of the investors plan to increase their infrastructure investments over the next 12-24 months.
The planned increase in infrastructure is the highest figure for all asset classes, but from a relatively low base, the report said.
Real estate is the next most popular asset class, with 32% of respondents planning to increase their allocation.
“This could amount to an additional $334bn investment in real estate and $130bn in infrastructure over the next two years,” the survey revealed.
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, the survey stated.
Hani Kablawi, the chief executive officer of global asset servicing and chairman of Europe, the Middle East and Africa at 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.”
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, the survey revealed.
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 the survey revealed.
In the light of these factors, asset managers face added pressure to demonstrate their value, the survey said, adding that 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, a managing director and global head of private markets at 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.”