An abundance of liquidity is driving the price of infrastructure and core property to levels where super funds are exploring tactical sell-offs.
Some clients of Frontier Advisors are contemplating such moves after receiving research that global investors with lower return targets are prepared to pay more for these assets.
The research carried out by Ashley O’Connor, a senior consultant at Frontier Advisors, involved a survey of institutional investors and drew feedback from the firm’s Global Investment Research Alliance (GIRA) partners in the USA (Segal Rogerscasey) and the UK/Europe (LCP).
This gauged global appetite for alternatives to government bonds and found a strong appetite for safety and yield.
Some of this demand comes from sovereign wealth funds with large war chests to build up allocations to real assets, sometimes from zero.
The Japanese Government Pension Investment Fund, the world’s single largest retirement savings fund, is currently being advised to lower its 65 per cent allocation to domestic sovereign bonds and diversify into other assets including infrastructure.
O’Connor said substantial sums of money were being set aside, some from institutions with lower return targets than Australian superannuation funds.
“They think these assets are paying a high yield because their cost of capital is lower and their return expectations are lower than ours, so they are prepared to pay higher prices than our clients.”
Frontier has been talking to clients about considering moves into other diversifying asset classes, downside protection strategies, or cash.
“We are seeing some examples of clients considering at what point they might sell some real assets, such as core property, and invest in other asset classes,” said O’Connor.
Given the illiquid nature of infrastructure and core property, O’Connor said it would be hard to pick the peak of the market to sell, but that early preparation was necessary. He said clients “might potentially build up cash to take advantage of opportunities in a down market.”
Clients of Frontier Advisors have average allocations to infrastructure of 10 per cent and to property of 10 per cent too.
The firm is also canvassing the use of put options with clients particularly concerned about protecting their portfolios against downside market shocks.
The research from Frontier Advisors coincides with a report from the Productivity Commission which has endorsed a fund raising method for infrastructure proposed by Industry Superannuation Australia (ISA).
In this inverted bid model a fund manager acts for a state government on a fixed fee and attracts bids to participate in new projects.
David Whitely said such deals would align the long term interests of a potential long-term investor who wants to own an asset for decades.