Pensions consultancy Redington is recommending to clients with capacity to invest in illiquid assets to move funds to blue-chip infrastructure projects, such as utilities, to avoid the present low returns on traditional liability matching assets.
"Achieving effective hedging combined with good returns is paramount in these turbulent times," Redington co-CEO Rob Gardner advises pension trustees and administrators in the firm's annual investment publication. "In the present economic climate, with deflationary and inflationary risks so evenly balanced, we suggest pension funds invest in infrastructure assets that will match their liabilities while providing attractive returns."
Volatile returns and increasing risks associated with equities "as well as the difficult economic environment in the U.K. and globally" mean funds should be turning their attention to instruments with strong liability-matching features as well as the potential for returns usually expected from so-called growth assets.
"The big banks - the traditional providers of infrastructure finance - have cut back their exposure to infrastructure enterprises, creating opportunities for pension funds to step in and invest. These illiquid assets carry a premium so offer better rewarded risk, however, some funds may be constrained by liquidity requirements," he said.
Redington points out that pension funds’ key concern now is how infrastructure assets can fit within their overall risk management framework, and whether it makes sense to invest in debt, equity or the entire asset. The firm, which specializes in ensuring funds' investment strategies are balanced, is at present advising a number of pension funds on an inflation swap based opportunity involving major investment banks and utility companies, offering expected returns in excess of Gilts+3%.
|
