Alternative credit and real assets could act as a bridge between the traditional return and liabilities portfolios as demand for matching asset changes, asset manager NN IP has argued.
Ageing populations and low interest rates have driven down interest rates, altering the way investors balance growth and matching assets, NN IP said.
Bart Oldenkamp, the firm’s managing director for integrated client solutions, highlighted mortgages, credit, property, infrastructure, and renewable energy as offering attractive returns combined with a low volatility and a low correlation with other asset classes.
In a presentation during the annual congress of the Dutch Pensions Federation, Oldenkamp said individual pensions accrual – part of a proposed new pensions system in the Netherlands – could trigger the need for different matching requirements.
He added that alternative credit and real assets could also increase the potential for responsible investment relative to a traditional asset class, such as government bonds.
Using an example of a infrastructure loan for a motorway, Richard Sanders, investment strategist at NN IP, said the loan could act as an alternative for interest swaps because of the stable rental income a government would pay over several decades. His example generated annual interest of 2.7%, which is 150 basis points higher than interest rate swaps and 60 above BBB credit, at the time of financing.
Sanders added that such a loan also contributed to diversification and had an environmental element: “The secondary route replaced by the motorway could become cleaner and safer. This effect is measurable.”
However, the investment strategist emphasised that the investment could not be used as collateral for derivatives because of its illiquid character.
“As the secondary market is limited, it is sensible to keep the investment until the end of its duration,” Sanders said
Oldenkamp added that an infrastructure loan was a more complex product than liquid alternatives such as credit and government bonds.
“It is not entirely risk-free and requires more expertise as well as attention for reporting and monitoring,” he said.