Some institutional investors are not yet prepared to invest in the infrastructure asset class. In its recent Discussion Notes report, Norges Bank Investment Management outlines the general heterogeneity of the infrastructure sector and the various risks and uncertainties that have led NBIM to refrain from investing in the sector.
The report ultimately argues, “different and complex definitions might suggest that infrastructure is at best a heterogeneous class, if it can be considered an asset class at all,” and would be more effectively categorized by the investor’s goals regarding each specific asset and how those line up with goals from various asset classes.
While taking a pass on infrastructure, NBIM (which invests on behalf of Norway’s $700 billion Government Pension Fund – Global, one of the world’s largest sovereign wealth funds) has been extremely active in the real estate market of late after the SWF upped its target real estate allocation to 5 percent. It has been focusing investments in Europe and the United States, including forming a joint venture last February with TIAA-CREF to own $1.2 billion of East Coast office space. However, the investment management team has decided not to invest in infrastructure, as the murky nature of the under-documented sector (due to its relatively short history of investment) is challenging to reconcile with the generally transparent nature of the bank’s investing.
The report itself details the wide variety of risks associated with infrastructure investing, including bid risk, operational/management risk, demand risk (which can be caused by risks from demographic, economic and political shifts), maturity risk, liquidity risk and regulatory risk — all of which can be applied to some infrastructure investments and not to others. Some of these risks can be lessened by a long investment period, others not. Some of these risks can be diversified away, others not.
Additionally, the report points to the fact that risk/return ratios for infrastructure investments can exhibit bond, real estate or equity characteristics, and that “the risk/return profile of an infrastructure investment generally arises form the nature of the underlying asset itself, the environment in which it operates and the choice of the investment vehicle.” Ultimately, this leads to investors looking to infrastructure with a wide variety of goals in mind and leaves no easy way to benchmark sector performance.
These widely varying investment properties of infrastructure may lead to it being deemed ineffective as a way to classify investments within a portfolio, as the report states:
“Investors considering investing in infrastructure should reflect on which role(s) such investments are expected to play in their total portfolio, and design their strategy to best support these objectives. The opportunity set is heterogeneous and the risk-return profile is shaped by the underlying investments, the investment vehicle chosen and the environment is which the asset operates. The diversification properties of specific investments should be assessed in a total portfolio context, rather than in the context of a sub-portfolio of infrastructure investments. The high degree of heterogeneity also raises the question of what level of aggregation would be appropriate for a meaningful risk-return-correlation analysis and what assumptions are reasonable to make in asset-liability managing. The combination of early-stage assets and mature-assets spanning a wide range of sectors into one broad category might not be appropriate.” [emphasis added]
And this may prove that infrastructure is truly not in a class of its own.
Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
