Move toward alternative investments augers well for push into infrastructure

According to a new survey by CoreDataResearch Ltd, 40% of the surveyed global institutional investors plan to increase their asset allocation to alternative investments in 2021/2022. This trend is of local relevance given the proposed changes to Regulation 28 that would allow retirement funds to increase their exposure to infrastructure investments, many of which are in the unlisted space.

According to Paul Boynton, CEO of Old Mutual Alternative Investments, the case for retirement funds to hold more of these types of assets is clear. “Given the real-economy linkages and inflation-driven tariffs, like renewable energy assets, infrastructure investments are particularly well suited to a retirement fund liability profile,” says Boynton.

He says that, unlike other growth assets, alternative investments are uncorrelated to listed equities and property. “Alternative investments as an asset class is not a place to immunise yourself against the systemic impact of COVID-19, although many have, in fact, weathered the pandemic very well,” he says.

“If you look at infrastructure investments like renewable assets, they have done very well, and toll roads have suffered a little, but not nearly as badly as listed assets, especially property.”

It is this characteristic that has grabbed the attention of global institutional investors, with the CoreDataResearch survey reporting that 90 per cent of respondents cited diversification as the main reason for increasing their exposure.

Boynton says that South African trustees should look to the Australian example of how infrastructure investments have been used by funds to deliver diversified, above-average, long-term results for decades.

He says the country’s superannuation funds have a record of strong outperformance since they were introduced in the 1990s as vehicles for the country’s compulsory retirement savings. These funds today dominate the retirement fund landscape, with their outperformance based on overweight exposure to infrastructure and global equities.

“It’s not an exaggeration to say that Australia was the founding father of infrastructure as an investment asset class. Assets that move up with inflation are a wonderful thing for a retirement fund to hold.

That evidence, then, supports National Treasury’s proposal to increase the Regulation 28 allocation to infrastructure investments. The ability to drive economic growth while offering retirement funds a new asset class that can deliver long-term, inflation-linked growth is both prudent and appealing, Boynton says.

However, for infrastructure projects to drive real economic growth they will need to have a strong developmental focus.

“The intent in the proposed amendments is clearly good, but I fear they’re not sufficiently clear on the scope of the infrastructure investments. For this to have real impact, developmental capital should ideally be directed at greenfields projects,” he says.

The danger is that capital could easily be directed to bond sales, for example, that would ultimately miss the developmental agenda.

In order for this opportunity to be realised, he suggests that retirement fund trustees need to become more comfortable with and knowledgeable about the asset class.

“Some retirement funds, he says, are very committed to this idea and have allocated up to the allowable limit, although the large majority of smaller retirement funds have found it difficult to engage in this space,” concludes Boynton.

“What this means for South African contributors to retirement funds and their trustees is the need to all be more thoughtful and enquiring about how our capital is being invested and the consequence of how it’s being invested.”