Chart: Pension Funds on Long-Term Investing

IPE long term investor

Investments & Pensions Europe released the results of a survey recently that asked pension funds to answer questions about long-term investing: do pension funds consider themselves long term investors? What makes long-term investing difficult? What are the advantages of taking a long view?

The survey results are interesting in light of a recent paper that examined whether pension funds were really acting as long-term investors.

The results can be seen in the graphics above and below, and can be read here.

 

IPE long term invest

Institutional Investors Cite Regulatory Risk, Transparency as Obstacles to Infrastructure Investment

Roadwork

The Organization for Economic Cooperation and Development (OECD) recently surveyed 71 pension funds on their interest in alternative investments.

[The full survey can be found here.]

The findings when it came to infrastructure investing were among the most interesting.

The survey found that the funds had increased their alternative investments across all categories between 2010 and 2013.

But when it comes to allocation, infrastructure still occupies the lowest rung on the totem poll.

The OECD sat down with institutional investors recently to ask why they might be hesitant to invest in infrastructure. From Investments and Pensions Europe:

At the recent OECD roundtable on long-term investment policy, institutional investors in attendance cited two main obstacles to infrastructure investment. First was the lack of a transparent and stable policy framework and regulatory risk was a top concern. Second was a lack of bankable investment opportunities.

Other important issues raised included clear and predictable accounting standards, long-term metrics for performance valuations and compensations, standardisation in project documentation, and transferability of loans and portability of guarantees. The expansion of financial instruments available for long-term investment (eg, bonds, equity, basic securitisation of loans), and the need for a clear risk allocation matrix to assign to the potential risk owner (government, investor or both) were also raised.

Ultimately, the primary concern for investors is investment performance in the context of specific objectives, such as paying pensions and annuities. Infrastructure can become an alternative asset class for private investors provided investors can access bankable projects and an acceptable risk/return profile is offered.

The study and roundtable were conducted as part of the OECD Long-term Investment Project.

Private Equity Eyes Longer Timelines For Largest Investors

binoculars

Some private equity firms are considering offering new investment structures that would allow their largest clients to invest over a longer period of time, according to a New York Times report.

The new structure would extend the timeline of some investments to over 10 years, which could appeal to institutional clients looking for longer-term, lower-risk investments in the private equity arena.

More details from the New York Times:

Joseph Baratta, the head of private equity at the Blackstone Group, the biggest alternative investment firm, said at a conference in Berlin on Tuesday that the firm was speaking with large investors about a new investment structure that would aim for lower returns over a longer period of time.

Mr. Baratta, whose remarks were reported by The Wall Street Journal, said the investments would be made outside of Blackstone’s traditional funds, which impose time limits on the investing cycle. Invoking Warren E. Buffett’s Berkshire Hathaway, Mr. Baratta said he wanted to own companies for more than 10 years.

”I don’t know why Warren Buffett should be the only person who can have a 15-year, 14 percent sort of return horizon,” Mr. Baratta said, according to The Journal.

His remarks, at the SuperReturn International conference, were only the latest example of chatter about this sort of structure in private equity circles.

News reports last fall said that Blackstone and the Carlyle Group, the private equity giant based in Washington, were both considering making investments outside their existing funds. Such moves would let the firms buy companies they might otherwise pass on — big, established corporations that don’t need significant restructuring but could benefit from private ownership.

[…]

Blackstone, which has not yet deployed such a strategy, might gather a “coalition of the willing” investors to buy individual companies, Mr. Baratta said. This approach could be attractive to some of the world’s biggest investors, including sovereign wealth funds and big pension funds, which, though they want market-beating returns, also want to avoid taking too much risk.

Read the full NY Times report here.

 

Photo by Santiago Medem via Flickr CC

Canada Pension Defends Saskatchewan Land Purchase

Canada

The Canada Pension Plan Investment Board (CPPIB) has had to absorb some criticism lately, stemming from its recent purchase of a large tract of Saskatchewan farmland.

CPPIB bought 115,000 acres of Saskatchewan farmland in 2013; but the fund is now coming under fire for artificially inflating land values, among other things. Some observers are worried that there is a disconnect between what is best for the land and what is best for CPPIB’s bottom line.

[Read the criticism of the deal here.]

CPPIB senior official Michel Leduc has responded to some of those remarks in a column published last week in the Leader Post. From the column:

CPPIB has the ability to spend money on improvements to the farms, and to own the land for decades. During that time many emerging countries will see rapid increases in population and wealth, increasing the demand for food. Saskatchewan has the potential to be a big beneficiary of this global trend.

We spent a long time studying farming dynamics before we bought this land. And we’re proud to own it.

[…]

For a long time now roughly 40 per cent of Saskatchewan’s farmland has been rented, rather than owned, by the farmers who farm it.

Within about six months of owning the land we ensured that 18 abandoned buildings were demolished, seven old storage and fuel tanks were removed, and three yard sites were cleared up.

In addition, two ponds that were being used to dump waste were cleaned out. An abandoned water well was capped. We are working on improvements to irrigation, storage and drainage.

We want to partner with local farmers to improve production techniques – and the livelihoods of those working in the sector.

[…]

CPPIB is a patient, responsible, long-term investor. We do not plan to amass huge individual holdings of farmland, or to squeeze out returns. We will make reasonable investments to improve farms and help those farmers who choose to partner with us to compete.

Read Leduc’s full column here.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Study: Pension Funds Can Work Harder To Be Long-Term Investors

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A new paper by Keith Ambachtsheer and John McLaughlin dives into the question: Do pension funds invest for the long term?

Nearly all pension funds would identify themselves long-term investors if asked. But the paper reveals that there is a gap between that sentiment and the funds’ actual investment strategies.

From ai-cio.com:

The authors […] reported a significant gap between the long-term investment aspirations of asset owners and the reality of their strategies’ implementation.

[…]

On long-term investment, the authors said there was “broad consensus” among respondents to the survey that a longer investment timescale was “a valuable activity for both society, and for their own fund.”

“However, there is a significant gap between aspiration and reality to be bridged,” Ambachtsheer and McLaughlin added.

“Here too a concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”

The authors listed the barriers to long-termism: some areas of regulation, a “short-term, peer-sensitive environment”, a lack of clear investment processes and performance metrics, and difficulties in aligning interests with outsourcing providers.

The paper, which also covers governance issues, can be read here.

 

Photo by Santiago Medem via Flickr CC

Institutional Investors Keeping Close Eye on Oil As Prices Continue To Slide

oil barrels

The price of oil dropped below $45 per barrel on Tuesday, and many Americans are undoubtedly enjoying the price drop – at least when they are filling up at the pump.

But the drop is causing “a lot of concern” for institutional investors, according to a Pensions & Investment report.

From Pensions & Investments:

The impact of low oil prices is mixed, but already are being acknowledged and felt by institutional investors.

“There is a lot of concern from clients,” said Tapan Datta, London-based head of asset allocation at Aon Hewitt. He said discussions are taking place among investors, looking at how to “protect themselves if things go seriously wrong. There is no doubt that it should be considered.”

One of the main concerns for pension funds would be the link between falling oil prices and lower inflation.

Pension fund liabilities are where the oil price drop could “bite,” said Mr. Datta, with falling inflation leading to even lower bond yields, and a subsequent rise in liabilities.

“Everybody is worried that the price (of oil) doesn’t seem to have a floor at the moment,” added Alastair Gunn, U.K. equities portfolio manager at Jupiter Fund Management PLC in London. “It is making equity holders quite jittery about dividends, and is making bondholders jittery about the risk of defaults.”

Pension fund executives are certainly paying attention. Ricardo Duran, spokesman for the $189.7 billion California State Teachers’ Retirement System, West Sacramento, said the bulk of the fund’s oil holdings are in the global equity and fixed-income allocations. As of Dec. 31, the $107.8 billion global equity portfolio invested about 5.9% in the oil and gas sector, covering areas such as exploration and production, refining and marketing, and storage and transportation, he said. That equates to about $7 billion.

Just less than 8%, or about $1 billion, of the $13.4 billion fixed-income credit portfolio is in oil, invested mostly in the independent and integrated energy sectors, in midstream holdings, oil field services and refining, he said.

“(The falling oil price) has exerted a downward pressure on the portfolio,” the spokesman added in an e-mailed comment.

CalSTRS executives are “closely monitoring the situation before determining what, if any, moves to make,” said the pension fund spokesman. “CalSTRS is a long-term investor and, while the drop in oil prices has been a cause for some concern, we have to balance that against growth opportunities the situation may create in other sectors of the economy in which we’re also invested.”

Several pension executives told P&I that, although they are watching oil carefully, they still retain the mindset of long-term investors.

 

Photo by ezioman via Flickr CC License

Pensions Uninterested in Indian Debt

India gate

Some of the world’s most prominent pension funds have been eyeing Indian infrastructure investments.

But pensions remain uninterested in the country’s debt. More from the Economic Times:

Despite record inflows in 2014, Indian debt was unable to draw attention of perhaps the stickiest investors in global arena -sovereign wealth funds (SWFs) and global pension funds. These two prominent categories constituted only 1.73% of foreign institutional investors (FIIs) assets under custody (AUC) in Indian debt in 2014 while their pie in equities was 17%.

“SWFs and pension funds participation has been tepid in debt securities compared with equities on account of two reasons. One, tight limits on government debts dissuade them from Indian debt instrument as it artificially creates demand and poses liquidity risks. Second, SWFs desire to see stability across macro variables ranging from currency to the current account deficit and accordingly , they invest for longer term. We have some semblance regarding stability, so we can see inflows to increase if things persist according to what we have seen last six months,” said head of treasury at an MNC bank on condition of anonymity .

[…]

Experts, however, believe that the phenomenon may reverse in the current year. In the last six months, the rupee has been least affected by the emerging market currency crisis. In case volatility in the rupee remains low for another couple of quarters, the outlook on Indian debt by SWFs will improve. In addition, sound decision making of the central bank, unlike the policies of central banks of Russia and Turkey, will boost confidence of these long-term investors. The central bank of the latter two countries had flip-flopped on the policy front.

The Canada Pension Plan Investment Board (CPPIB) has been active in India and considers the country a “key part” of its long term plans.

Pensions Eye Indian Infrastructure

India

In December, the Canada Pension Plan Investment Board (CPPIB) made a $157 million investment in the infrastructure arm of an Indian engineering company.

The CPPIB says investments with India are a “key part” of its long-term plans.

Other pension funds may also find the county’s infrastructure to be an attractive investment. From the Economic Times:

Indian road projects are likely to post a significant rise in merger and acquisition activity in 2015 as pension and private equity funds are eyeing these projects for handsome returns.

Increase in road traffic and a better economic climate have made the sector lucrative for investors with deep pockets, looking for long-term investment opportunities. In the last one month, two road projects have changed hands and sector players and experts anticipate more such deals in the offing.” Funds and institutional investors are interested in high yield, long-term investments and road projects offer a good opportunity.

[…]

“Revenue from roads will improve as GDP picks up, so it is an attractive investment option. The slowdown in the last two-three years has dampened the price expectation of developers, so the mismatch in valuation expectation has reduced,” said MK Sinha, managing partner and chief executive officer of IDFC Alternatives.

[…]

Infrastructure industry players said that more pension funds are in the market scouting for investment opportunities, with a clear preference for operational road projects. Pension funds primarily manage funds for people who are retiring and looking for low-risk investments with consistent returns for in the long term. Their interest in Indian infrastructure will augur well for the capital-intensive business whose long-term capital needs cannot be met my banks alone.

In 2014 the CPPIB announced plans to open an India office.

How Much Are Low Oil Prices Hurting Retirement Accounts?

oil barrels

Americans are thrilled to be saving money at the gas pump. But low oil prices aren’t good news for everyone – namely, oil and gas companies.

And that affects many Americans who are invested in oil and gas companies through their retirement accounts. But how much do low oil prices really hurt retirement funds?

Dan Boyce from Inside Energy explores the question:

Oil was at $55 to $60 a barrel just before Christmas, down from a high of more than $100 per barrel this summer.

Wanting to see just how much stake the average person has in oil and gas, we found that the most direct way to get access to sensitive personal financial information was if we analyzed one of our own retirement accounts. I humbly volunteered my own T. Rowe Price Roth IRA.

It’s a meager account, containing a little more than $4,200 at this point, and analyzing it for my oil and gas holdings revealed how complex the modern retirement portfolio really is.

My $4,200 splits among 19 smaller funds, which are invested in thousands of sources. The list ranges from companies like Tootsie Roll Industries and WD-40 to countries like Norway and even World Wrestling Entertainment.

It turns out a little less than 6 percent of my IRA is directly invested in oil and gas companies, or about $243.

Scott Middleton, who works with investment consulting company Innovest, said this mirrors the national average for retirement investments in energy at somewhere between 5 to 10 percent.

It’s true for IRA accounts like mine, as well as for others like 401(k)s, 403(b)s and pension funds.

The Colorado Public Employees Retirement Association, for example, has about 7 percent of its total portfolio in the energy sector, which in Wall Street-speak basically means just oil and gas. It makes up about 9 percent of the total stock market.

Middleton said as oil prices shrink, so, too, does my $243 in oil and gas investments. And so do most of the other funds invested in the same stocks.

But Boyce offers a few qualifiers that muddy the picture of just how much falling oil prices might hurt retirement savings:

A couple of things to remember, though. For one, I’m betting on my retirement account for the long term. The account is based upon the premise that I won’t start withdrawing from it until 2055.

Short-term fluctuations in price shouldn’t really concern us. Over the long term, the energy sector has been considered a very safe investment, yielding about a 10 percent annual rate of return.

Also, while declining oil prices might be bad for one part of my portfolio, they’re good for other parts. For example, Middleton said chemical producers and transportation companies tend to do well with lower oil prices.

Ultimately, oil and gas is not a critical part of our retirement funds. But, make no mistake, our retirement funds are absolutely critical for the oil and gas industry. The American Petroleum Institute says about 70 percent of U.S. oil company worth is owned by tens of millions of U.S. households through our IRAs, our pensions and our mutual funds.

Read the whole piece here.

 

Photo by ezioman via Flickr CC License

Benchmarks, Transparency Could Bring More Pension Funds to Infrastructure, Says Group

Roadwork

The European Association of Paritarian Institutions (AEIP) last week called for greater transparency and more performance data in the infrastructure sector.

These changes, according to the AEIP, could help attract more pension funds to the sector.

From Investments and Pensions Europe:

Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).

Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.

“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.

It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class.

It also identified an organisation’s scale as problematic to taking full advantage of the asset class.

“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.

“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”

The association called on governments to play their part in making infrastructure accessible.

“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”

Read the paper here.