Norway: The Problems (and Some Solutions) for Infrastructure Investors

(November 22, 2013) — Norges Bank Investment Management (NBIM) has described the biggest challenges it faces when tackling the opportunity of infrastructure investing.

In a discussion paper, the investment manager for Norway’s Government Pension Fund-Global said the diverse nature of infrastructure assets caused problems with benchmarking performance and deciding where to put it in the portfolio.

Infrastructure investments can exhibit bond, real estate, or equity characteristics, the report said, which means the risk-return profile of the asset can differ greatly, depending on the choice of investment vehicle.

This leaves “no ‘right’ way” to benchmark such investments and poses a problem for the notoriously transparent nature of Norwegian investing.

For more stories like this, sign up for the CIO Alert newsletter. 

The paper also discusses the multiple risks investors face when investing in infrastructure, including bid risk (the chance that their contractor might not win the deal), construction risks once the project has begun, and operational and management risks once the project is completed.

Liquidity risk (given it is often difficult for investors to have an “exit plan” from infrastructure assets), political risk, and regulatory risk were also highlighted.

And even though experienced investors can lessen some of those risks with a toughly negotiated contract, NBIM warned there are some hazards that can’t be managed away.

“Anecdotal evidence suggests that there are some systematic risk factors at work. These factors may be related to issues such as global market cycles, regional and political crises, and regulatory trends. The magnitude of such risks has, however, yet to be properly researched and should be an area for future research,” the report said.

NBIM has, to date, found it too difficult to invest in infrastructure, largely due to its opaque nature. While it has progressed into real estate with great aplomb in the past two years—including acquisitions of Sheffield’s Meadowhall shopping centre and Parisian commercial real estate—it has so far steered away from infrastructure assets.

Speaking to aiCIO in 2012, Elroy Dimson, chairman of the fund’s investment strategy board, said the prices were too high for the Norwegian fund to consider, and the lack of transparency was a big concern.

“Infrastructure is attractive and inflation-linked, but the problem for the moment is that they don’t know if they are under or overpaying for the assets,” Dimson explained.

The pricing issue has been highlighted by other institutional investors too: Preqin data released this week found 49% of infrastructure investors disagreed or strongly disagreed that fund managers’ and investors’ interests are properly aligned regarding costs and fund terms.

In addition, 73% of infrastructure investors surveyed by Preqin said the level of the management fee charged by fund managers is a key area where alignment of interests can be improved.

Despite investor demands that fund managers move away from the traditional “2 and 20” private equity fee structure, a significant 61% of 2012/2013 vintage infrastructure funds and those currently being marketed charge an investment period management fee of 2% or more.

Elliot Bradbrook, manager of infrastructure data at Preqin, said investors were increasingly unwilling to buy into the this structure when gaining exposure to lower risk-return profile infrastructure assets.

“Although improvements have been made in recent years, it is vital that fund managers are able to effectively articulate the reasoning behind the fees being charged, and continue to consider the appropriate structure of the terms and conditions employed their funds in order to align interests effectively and achieve success in the competitive fundraising market,” he concluded.

(November 22, 2013) – Swedish bankers’ pension fund SPK will drastically alter its asset allocation strategy, increasing its portfolio from three asset classes up to 10 in 2014.

CIO Peter Hansson first broke the news to aiCIO back in September, but was limited at the time on how much he could divulge.

Now, however, Hansson explained the decision had been taken to expand the portfolio into up to 10 asset classes—down from an earlier suggestion of 15—with all of them being controlled by external managers.

“We started to redesign the asset and liability of SPK in February,” Hansson said. “We spoke with five different parties – Goldman Sachs, JP Morgan, Danske bank, Deutsche Bank, and Nordea, and had extended conversations about our asset liability management which passed back and forth.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“We then redesigned and tested everything, and we’ve now seen that we need to make a new strategic allocation for the future. We started with a blank piece of paper, looking at the situation right from the beginning.”

At the moment the fund is invested 70% in fixed income, 20% in global equities, and 10% in Swedish equities.

Although he was not willing to divulge exactly which asset classes the pension fund would be moving into, Hannson did say the investments would all be done on a fund basis, rather than through discretionary accounts.

“When we started the process we looked at 30 to 40 asset classes and deleted them one by one while asking if they’d have an impact on our fund or our organisation. The SPK DNA of ‘Keep it Simple Stupid’ will still exist, we want to keep it simple,” he said.

That simplification will apply to how managers implement their strategies too: in Hannson’s words SPK is “good at hiring and firing managers, and so we need them to be easy to jack in and jack out”.

And Hansson was adamant that allocation strategies, foreign exchange overlay, derivatives strategy, and short-term risk control will continue to be run in-house.

One area the fund is less interested in is the current trend for environmental, social, governance and/or social responsible investment (SRI) funds.

As other pension funds in the Scandinavian and Nordic areas increasingly look at direct investments and doing more than simply applying filters to indices, Hannson dismissed the idea of having an ethical fund as one of his new options.

“On a yearly basis we scan our holdings, even if they’re in funds, and then decide what to do. But we won’t limit ourselves to just having SRI products, we think the fund managers should do that,” he explained.

Further analysis and testing will continue until the end of this year, when Hansson will finalise on his final asset class set up.