For most super funds and other Australian institutional investors their experience with the ownership of infrastructure assets has, by and large, been a happy one. Not the same can be said for all such investors. Each of the eastern States has at least one disastrous toll road experience for investors and many retail investors in listed infrastructure funds were taught a painful lesson by the GFC. According to Mike Fitzpatrick, a veteran of the asset class, much of the recent criticism of infrastructure – and certainly that part assigned to the investment banks which packaged and promoted many funds – is justifiable. He predicts that the days when investment banks fed transactions by outbidding each other to win tenders and then structuring the investments into funds, often with long-term management contracts in place, are hopefully over. Fitzpatrick, along with chief executive John Clarke and non-executive director Les Fallick, last year bought the ANZ infrastructure business, which Clarke had run since inception and had about $1 billion invested in two unlisted funds.
Things will probably be okay now … but maybe not
If you thought the global financial crisis was over, don’t be too hasty. Scenario analysis by MLC Investment Management – placing probabilities against 40 different scenarios – puts the possibility of further massive falls in values for some asset classes a little too likely, or not unlikely enough, for comfort. While not alarmist, with the most likely probability being continued recovery, the analysis illustrates the uncertainty embedded in asset values over the medium term, particularly for Australian and global equities and emerging markets. Susan Gosling, head of capital markets research for MLC, has produced a summary of the analysis to illustrate recent asset allocation adjustments to some MLC funds – the “horizon” series and long-term absolute returns fund. She compares these with the probability of weighted real returns for most asset classes.
Universal picture: Back to the future with Cooper
If Australia’s fund members are divided into four categories as Jeremy Cooper wants them to be, there’s a good chance that much of the colour and innovation we see today could be lost. To me the most startling recommendation was the one which, in my opinion, would see just about every Australian worker not already operating a self-managed fund placed instead into a “universal” category, under which they would be sent “back to the future”. They’d be offered only one investment strategy (confusingly the report says this should include a target-date strategy), with vanilla insurance and minimal reporting.
Tail wagging the dog
Two recent reports by Towers Watson and Ernst & Young have identified similar criticisms of infrastructure as an asset class, and these include high entry and management fees, illiquidity, lack of transparency, and hurdle rates. Frontier Investment Consulting’s clients have about $12 billion in infrastructure [half of that in Australia], and Chris Trevillyan, who heads Frontier’s research, concurs with most of the reports’ criticisms and adds more. “There is a real issue with the dearth of attractive infrastructure fund managers in the marketplace, including structural issues with related party concerns, fees and inappropriate protection of investor rights,” he says.
Citi punts on overseas equities
Fund managers should be looking to reduce cash balances, and move into equities to leverage into the economic recovery in the next 18 months, says analyst Richard Schellbach, Citi Investment Research. “Funds need to prepare for a Chinese renminbi revaluation or devaluation, and identify the asset classes globally that have been distorted by this excess money coming out of China and Asia,” he warns. Local fund managers have to pay attention to which asset classes are being “pushed out of whack”, such as emerging market equities, and some specific commodities – for example, energy. For 2010, Citi prefers overseas shares to Australian equities because the locals are trading at a rare PE premium, says Schellbach, “and we face currency headwinds for earnings”. This overearning, due to the commodity super-cycle, is abnormal relative to local equities’ history and to global companies.
Citi punts on overseas equities
Fund managers should be looking to reduce cash balances, and move into equities to leverage into the economic recovery in the next 18 months, says analyst Richard Schellbach, Citi Investment Research. “Funds need to prepare for a Chinese renminbi revaluation or devaluation, and identify the asset classes globally that have been distorted by this excess money coming out of China and Asia,” he warns. Local fund managers have to pay attention to which asset classes are being “pushed out of whack”, such as emerging market equities, and some specific commodities – for example, energy. For 2010, Citi prefers overseas shares to Australian equities because the locals are trading at a rare PE premium, says Schellbach, “and we face currency headwinds for earnings”. This overearning, due to the commodity super-cycle, is abnormal relative to local equities’ history and to global companies.
Citi punts on overseas equities
Fund managers should be looking to reduce cash balances, and move into equities to leverage into the economic recovery in the next 18 months, says analyst Richard Schellbach, Citi Investment Research. “Funds need to prepare for a Chinese renminbi revaluation or devaluation, and identify the asset classes globally that have been distorted by this excess money coming out of China and Asia,” he warns. Local fund managers have to pay attention to which asset classes are being “pushed out of whack”, such as emerging market equities, and some specific commodities – for example, energy. For 2010, Citi prefers overseas shares to Australian equities because the locals are trading at a rare PE premium, says Schellbach, “and we face currency headwinds for earnings”. This overearning, due to the commodity super-cycle, is abnormal relative to local equities’ history and to global companies.
Don’t DIY in infrastructure, IFM tells super funds
Large superannuation funds should be fully aware of the skills and governance structure required to strike infrastructure deals before they decide to build internal teams or pursue co-investment opportunities to gain further exposure to the unlisted assets, Industry Funds Management (IFM) executives warned. Christian Seymour, IFM executive director – Europe, said funds that were considering building large infrastructure teams should be prepared to accept the workloads and resources required to skilfully originate infrastructure deals, negotiate transactions and manage the assets – and then question whether their governance framework enabled them to swiftly deploy capital when opportunities arose. “In the heat of an infrastructure transaction, when you have to make decisions quickly – a lot of funds aren’t set up to decide on a price and draw down on the capital within 10 days,” Seymour said.
No giant leap needed for Australia to host Shariah funds
Despite the wealth of the Middle East and the near proximity of Islamic nations Malaysia and Indonesia, Australian fund managers have not opened up to the $55.4 billion global Islamic investment market. Even though Australia aims to become a major financial centre in the Asia-Pacific region, and its advanced financial system and resilient economy would be attractive to most investors, most domestic managed funds remain off-limits to Islamic institutional and retail investors because the products do not comply with Shariah, Islamic law. According to Zein El Hassan, partner with law firm Clayton Utz, the 700 funds comprising the global Shariah investment industry hold about $55.4 billion under management.
Efficient beta is the new grail
The status quo of “passive” equity investment”, ranking companies by market capitalisation, is delivering lower returns for higher volatility than a beta strategy which blends a cap-weighted approach with two of its competitors – minimum variance and fundamental indexing. This is the marquee finding of a new research paper coauthored by two Lazard Asset Management quants, Paul Moghtader and Craig Scholl, as well as two executives from fundamental indexing firm Research Affiliates, founder Rob Arnott and Vitali Kalesnik. The head of Lazard AM in the Asia-Pacific, Rob Prugue, said the paper was commissioned partly through “disbelief ” that trustees still thought they could make a “truly passive” investment decision.
MLC busy chilling out
MLC Investment Management has revealed its plans for 2010 and it’s going to be a busy year doing as little as possible, says Brian Parker, MLC’s investment strategist. Speaking exclusively with I&T News, Parker said that, post-GFC, MLC will not be active and it will not be doing Tactical Asset Allocation each month. “We’re being asked to manage 15-, 20-, 40-year money, but being asked to manage it in 3- to 5-year chunks,” he explained. “So, if you’re going out on a limb to take risks, or take some risks off the table, then you can be wrong for several years before you’re proved right. How do you combat that?” MLC will be doing this is two ways, he said. “We’re not going to be very active.
Fund managers indulge in fall from grace
The funds management industry has profited from manufacturing too many bad, unnecessarily complicated products, according to Alan McFarlane, the former managing director of global equities boutique Walter Scott, and had for too long supported the “malign” commissions-based remuneration system still used by many financial planning dealer groups. Voicing his personal opinions, and not those of Walter Scott as a company, McFarlane said the fat profits on offer in the industry had attracted an influx of managers and spurred the development of too many complex products in the name of risk management, benefiting practitioners far more than investors. Even though investment outcomes can never be guaranteed, the industry as a whole put too much faith in the effectiveness of diversification – and new products – to offset risk.
