REST Industry Super was established in 1988, originally named the Retail Employees Superannuation Trust before changing its name two years ago. Open to all Australians, REST is among the country’s largest funds by membership, with more than AUD25bn (€17.6bn) of funds under management.

Infrastructure is a key asset class for REST, a standalone allocation and a good fit, according to Jo Townsend, who has been the fund’s general manager for investments since early 2008. REST currently has two investment managers running its infrastructure exposure, one wholly owned by REST and the other an external company. They currently manage around half of the exposure each.

“Until about four years ago, REST used to classify its infrastructure investments as part of its growth alternatives asset class,” says Townsend. “But it was then split to recognise that it was viewed as an asset class in its own right, and that REST’s strategy was to be a long-term investor.

“REST invests in infrastructure investments to enhance the risk-adjusted returns of its multi-asset class investment options while also providing some hedge against inflation, as the revenue of many infrastructure assets is directly, or indirectly, linked to inflation. REST considers infrastructure to sit between listed equity markets and fixed interest investments.”

REST has an actual weighting to infrastructure of approximately 5%, below its strategic benchmark allocation of 6%, which it would like to hold. It only holds direct infrastructure at this time and, as Townsend says, it is all totally illiquid.

“We’re one big deal away [from our 6% benchmark],” she says. “Then if we did one big deal each year we’d pretty much be able to sustain that benchmark. We have quite a well-developed portfolio today. But, given the growth profile of the fund, there are challenges around making sure we are buying stakes and assets that are going to be meaningful on a medium-term time horizon.”

REST’s infrastructure portfolio is currently invested 70% in Australia and New Zealand, and 30% elsewhere. The fund has guidelines to the extent to which it invests in different types of countries, and has no investments in emerging markets.

“As a general rule we’re happy to hold more in a triple-A-rated country than in a country with a lower credit rating,” says Townsend.

The portfolio is allocated approximately 65% to utilities with investments in electricity, gas pipelines and water assets; investments in airports account for a large proportion of the remainder.

“We’ll consider deals put in front of us [and the diversification benefits they add to the portfolio],” says Townsend. “We don’t target, for example, to get airports to 40% or to have exposure to wind to 30%.

“REST is aiming to build an asset class that provides exposure to assets at various stages of development, from greenfield to mature assets. REST is a growing fund and in the infrastructure sector aims to be a buy-and-hold investor. So, REST seeks to invest in assets that can be held for the long term. However, REST is also an active investor and expects its infrastructure managers to actively manage the assets they invest in on REST’s behalf.

“This may include disposal of assets based on the managers’ assessment of the future risk and return profile of the asset, or other considerations. Given REST’s growth profile, assets that offer organic and expansion-growth potential over the long term are well suited for inclusion in the infrastructure asset class,” says Townsend.

REST aims to have an infrastructure portfolio has overall defensive qualities: exhibits a moderate level of capital-value volatility (and growth over time) and produces a stable income yield.

The risks associated with investing in infrastructure tend to be very asset-specific and so the need to undertake specific due diligence when considering acquisitions is paramount, according to Townsend. REST also has a policy to fully hedge all of its infrastructure investments back to the Australian dollar.

“In looking at a potential asset, we will look at the following: economic risks, legal and contractual risks, currency risks, political and institutional risks, social and cultural risks,” Townsend says.

REST will continue to source meaningful allocations to assets that meet its investment criteria, according to Townsend. However, whilst it is usually possible to buy good assets, it is not always possible to buy them at a price the fund is prepared to pay, she adds.

“Our disciplined investment process means that each individual investment must meet minimum expected return and risk parameters before it will be considered for inclusion in the portfolio,” Townsend says. “We are aiming to build a broadly diversified portfolio across industry sectors, development stages and regulatory regimes.”