Australia Property and Infrastructure Lure Canadian Pensions

Canadian pension funds will increasingly look to Australia for long-term infrastructure and investment opportunities, according to an industry panel hosted by The Trust Company.

(June 27, 2012) — Canadian pension funds are increasingly seeking long-term infrastructure investments in Australia, according to a panel hosted by The Trust Company (TTC).

Canadian investment in Australian property and infrastructure has ballooned in recent years, with Australia now the third largest global destination for Canadian direct investment abroad (excluding tax havens), according to the TTC, a trustee company that offers services including infrastructure custody. Canadian direct investment in Australia is approximately C$25 billion, making the two-way investment between both Australia and Canada around C$45 billion.

“Canadian investors are looking for stable returns in the current low-yield environment and are showing a strong interest in Australia given its proximity to Asian markets and, in particular, China,” said Andrew Cannane, general manager of corporate clients at TTC. “On a relative risk weighting Australia is still a most attractive investment destination for investors; it is highly transparent, it has legal certainty, and a 4.3% GDP growth.”

The panel featuring Scott Farrell and Matthew Stutsel, partners at KPMG; Komu Kumar, investment director of financial services at Austrade Canada; and Andrew Cannane, general manager of corporate clients at The Trust Company, looked at opportunities presented by the wave of Canadian investment into Australian infrastructure and property.

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Meanwhile, earlier this year, the Canada Pension Plan Investment Board, which manages about C$155 billion, told Bloomberg that it plans to increase its longer-dated investments in Australia to boost returns. “We would like to grow CPPIB’s presence here,” the Canadian fund’s Chief Executive Officer David Denison told the Canadian Australian Chamber of Commerce in Sydney, according to an e-mailed copy of his speech. In April, OMERS announced the start of a Global Strategic Investment Alliance (GSIA) alongside initial alliance members Pension Fund Association (PFA) and a consortium led by Mitsubishi Corporation (MC), both of Japan.

The sentiments about Australian infrastructure and property investments also follow efforts last year among Canadian funds to form a global alliance of infrastructure investors that would help pensions further build up its portfolios. In March of last year, the Ontario Municipal Employees’ Retirement System (OMERS) proposed the alliance at a pension conference in the United Kingdom. Infrastructure – a common investment for large pension funds due to their steady cash returns – has been a staple of OMERS’ portfolio for years through its Borealis subsidiary, but is gaining momentum elsewhere as funds grow in size and are thus able to allocate more capital to these often illiquid investments.

Related article: Infrastructure—or Imprudent?

A new white paper from Silk Invest contends that the time is now to invest in “frontier markets” but with potentially high reward comes daunting risk.

(June 27, 2012) — “Frontier markets” represent the best investment destination for institutional investors but they need to act quickly to secure the most robust returns, a new white paper from asset manager Silk Invest asserts.

A balanced investment approach to frontier markets—the 39 markets that Silk Invest calls “the next generation of Emerging Markets”—should yield strong returns, the paper argues, similar to that experienced by those who invested in the so-called “BRIC” markets in the 1990s.

“Opportunities in Frontier Markets exist in abundance across asset classes and investors can unlock the full potential of these markets if they follow a credible and active approach which is ‘in touch’ with local markets,” concludes Dr. Heinz Hockmann, chairman of Silk Invest. “The right timing is now. The ship is already sailing.”

The paper recommends investments in countries in the Middle East, like Oman and Bahrain, in Europe, like Ukraine and Bulgaria, and in Asia, such as Sri Lanka and Kazakhstan. It stresses the attractiveness of markets traditionally seen as frontiers, particularly those in Africa like Namibia, Botswana, and Zambia. Investments in markets in Central and South America are also encouraged.

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While diversified fixed-income investments are lauded, the paper particularly stresses the opportunities offered by private equity investments. It points to the example of the IFC, an investment division of the World Bank, which enjoyed annualized returns of 22.2% on its private equity investments over the past 10 years. “The IFC has reaped the rewards of being an investment pioneer in new markets,” the paper contends.

Yet questions about the inherent risk of frontier markets remain for institutional investors. At the Pension Fund Forum in Copenhagen last year, Danske Bank Chief Analyst Lars Christensen summarized the conflicted thinking of investors torn between the prospect of dazzling returns and disheartening risk with frontier market investments: “The problem at the moment is there’s no market. How do you invest in Uganda? Right now your best bet is to fly over there with a suitcase full of dollar bills, but for most us that’s not an option. There are opportunities coming through however. Africa is still risky but makes for an extremely interesting growth story.”

Last summer, aiCIO asked (only half-jokingly) whether the United States, with its financial difficulties and political turmoil, should be considered by institutional investors as a frontier market: “Is America, in spite of its collection of faults—or, perhaps, because of them—the next great frontier opportunity?” To read “American Frontier,” click here.

To read the Silk Invest paper in full, click here.