My way or the highway, the old saying goes.
In the institutional investment community, my way includes the highway might be more appropriate.
In certain cases, up to 17% of the total assets in an institutional investor’s portfolio are invested in infrastructure today, according to data from the Ontario Municipal Employees Retirement System (OMERS) 2016 Annual Report.2
What’s behind all this? What might institutional investors have uncovered that could be helpful in potentially generating an additional source of market returns—the first principle of our low-return imperative?
The low-return imperative: A quick review
It’s no secret that we believe future market returns are likely to be low—and many analysts agree with us.3 In fact, we view low returns as the single greatest challenge facing investors today. To combat this, we’ve taken to beating the drum on what we define as the low-return imperative—the idea that when expected future market returns are likely to be lower than the required rate of return, we believe an investor cannot afford to ignore any investment strategy that may offer incremental return, take on risks they do not expect to get paid for or disregard implementation efficiency.
This is where infrastructure comes into play. We see it as a shining example of the low-return imperative’s first principle: it’s an asset class that cannot be ignored in the search for additional returns. To understand why, it’s helpful to first take a step back and define what it means.
What is infrastructure?
Infrastructure is a fundamental building block to the functioning of modern society and can include energy, transportation and communication networks and systems. Within the broad infrastructure investment universe, there exists what we call pure play infrastructure. Pure play infrastructure assets typically provide essential services, operate in monopoly-like competitive positions and enjoy sustainable cash flows producing reliable income streams. By way of example, we consider an airport to be a pure play infrastructure asset, as opposed to an airline. Another example would be a toll road, as opposed to a construction company that builds the toll road.
Today, infrastructure is recognized by the institutional investment community as a stand-alone asset class. To wit, many pension plans around the world have been attracted to the infrastructure asset class since the early 1990s. But why?
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