On the Record: Do you invest in real assets?
Walter Anedda, Chairman
• Location: Rome
• Assets: €7bn
• Members: Over 68,000
• First-pillar pension fund for chartered accountants
As of today, we have 10% invested in real assets. If we define real assets as all the assets that are directly linked to the real economy, including private equity and private credit, the exposure grows to 15%. The value of the portfolio in the broader definition is over €1bn.
Investments in infrastructure and in the real economy represent the typical investment solution to the low interest-rate environment. They provide predictable cash flows and stable returns with a low correlation with the equity and fixed-income markets. Furthermore, the direct link with inflation and the resulting hedging of pension liabilities are the main strategic reason that persuades us to increase the existing exposure.
Last but not least, infrastructure investments help us fulfil our social objectives. In 2013, we started investing in infrastructure through pooled funds contributing to projects with a social impact, such as Cascina Merlata and Fondo Investimenti per l’Abitare, both of which are social housing projects, and F2I, an infrastructure fund.
Without diverting our attention from the domestic market, we recently started to expand our portfolio by looking for international managers that could provide us with a more diversified exposure, both in terms of geography and regulation. The latter is a key risk factor in this asset class.
CNPADC leverages on a network of specialist advisers. Our procedures determine the roles and responsibilities of each participant involved in the selection process. Investing in infrastructure requires deep due diligence, much like any asset class. The most challenging aspect is selecting the instruments and managers that are the most appropriate for our assets and liabilities. However, thanks to our advisers, our growing internal competencies and the efficient selection procedures, we are building an increasingly mature portfolio in this asset class.
If the opportunity to join forces with other investors on infrastructure investments arises, we will consider taking it, as long as we can preserve our own requirements and autonomy in decision-making.
Wolfram Gerdes, CIO
• Location: Dortmund
• Assets: €11.5bn.
• Members: 510,000
• Pension fund for church employees and clergy
Our real asset exposure consists primarily of private equity and real estate. We have a strategic target of about 15% of the balance sheet and we are currently slightly short of that. In private equity we are targeting about 5% of balance sheet. We see private equity as fundamentally similar to listed equity. Obviously we take into account the additional complexity, lack of liquidity and volatility of the asset class. However, private equity offers a substantially higher yield than many asset classes. At the moment it is slightly more difficult than usual to invest in this market, because demand exceeds supply. But strategically it remains an attractive long-term opportunity.
In terms of our strategy, we have set up a SICAV structure in Luxembourg as a platform for all our private equity investments. Part of the platform is dedicated to investments in funds of fund managers. We also use the platform to access general partners (GPs) directly.
The benefit of this structure is that it solves the issues around legal due diligence once and for all. We can access a very wide range of GPs without any additional work. We always do deep due diligence, but this way we do not have to set up the legal framework for every investment. The platform basically offers the scale we need.
In real estate, historically we have always been an investor in residential property in a 100-150 mile radius from our headquarters in Dortmund. We typically target unleveraged returns after cost of 4% or slightly higher. The track record shows that it is a reasonable target. The supply of interesting investment targets is also short these days, so we have engaged in developing larger residential complexes ourselves or with partners. This allows us to get to the purchase pipeline before the projects are finished. To fill our real estate target of 10% of the overall portfolio balance sheet we also invest in funds. We find that the lead time for investing in funds can be long, because finding quality investments takes time nowadays.
We do not target infrastructure specifically. Clearly, infrastructure projects do make sense for many reasons. But the fact is that demand and supply just do not meet. In Germany, at least, the infrastructure market is relatively small. If you cannot fill 4-5% of your portfolio with infrastructure investments, then it becomes an opportunistic investment, one that does not make a huge difference to your strategic asset allocation.
Anne Charlotte Mark, Head of equities and alternatives
• Location: Hellerup
• Assets: DKK268bn (€36bn)
• Insured: 716,840
• Labour market pension fund
Sampension defines real assets as real estate, timber and infrastructure. Real estate investments have been part of the portfolio for at least 30 years. Sampension began investing in timber in the US in 2002. The first direct investment in infrastructure was made in 2014. However, we have had some indirect exposure earlier on, since some of the private equity funds in our portfolio have invested in infrastructure assets.
The reasoning behind including real assets in a portfolio is threefold: it adds diversification to the total portfolio; the returns are typically more stable because of the yield component (although this is only valid for core assets); and in most cases there is some element of inflation protection.
Sampension has an exposure to real assets that constitutes about 14% of total assets. By far the biggest part of this exposure consists of real estate, with an equal split between indirect and direct investments.
Today we invest both directly and via funds. The strategy is to invest directly in core assets with relatively low return/low risk characteristics. It is more cost-efficient and prudent to source and do due diligence on these types of assets domestically. However, we also have expertise in some of the markets near us, such as the UK and Germany. On the other hand, when we invest indirectly via funds we seek a big element of value-add from the manager to justify the more costly private equity wrapper. Furthermore, we have recently started to set up discretionary products with managers. These types of investments will be larger in size, more cost efficient and tailor-made to fit our portfolio. Also, we will be closer to the investment process and have more influence.
Over the years we have developed a very thorough due diligence process for alternative investments both for direct investments and fund investments. Occasionally we will join forces with one or more of our peers, either if we are looking at the same fund or direct investment, or, in the few cases where there are problems, in a fund. We will, however, do our own internal due diligence in the majority of co-operative investment processes.
Looking ahead, we are relatively positive on real assets. Naturally some adjustments in NAVs are to be expected when interest rates increase. However, if you are selective and stick to a required return that incorporates a fair risk premium to bonds, we believe a real assets exposure will enhance your risk-adjusted portfolio return.
Interviews conducted by Carlo Svaluto Moreolo