Inclusion of infrastructure in
MySuper
June 2017
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What’s changed?
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We’ve introduced an allocation to infrastructure in MySuper.
The allocation is a mix of listed and unlisted.
It’s been funded from fixed income allocations.
We’re targeting to invest up to 2% in infrastructure, however the actual asset
allocation is currently 0.25% (as at 30 April 2017).
The benefit of including infrastructure is that it provides a stable, predictable yield and
is diversifying to other asset classes.
There’s no impact to overall fees from this change.
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Why hasn’t MySuper invested in infrastructure previously?
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MySuper was established in 2013. At that time we did not anticipate how low interest
rates would go or how strong the rally in these assets would be.
The bullish valuation cycle means many of these assets have been expensively priced,
which has justified a cautious and selective approach to investing in this area.
In addition, as a new investment option in 2013:
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we prioritised directing initial funds inflows to more liquid assets, and
we needed to maintain fund liquidity to help facilitate the orderly transfer of member accounts
(Accrued Default Amounts) into MySuper (as required by the Stronger Super regulations).
Unlisted assets are typically illiquid, valued relatively infrequently and have a long
implementation lead-time.
For MySuper’s initial allocation to unlisted assets we preferred investing in global
private assets, which has performed exceptionally well.
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Why are we investing in infrastructure now?
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MySuper now has significant FUM (approx $20bn) and inflows are positive.
The transition of members from other default funds is complete.
MySuper is in a good position to use its scale and stronger liquidity position to
selectively invest in high quality, well priced infrastructure opportunities when they
arise.
We will be moving in a very measured and selective way and seek to take advantage
of any distress in the market to acquire assets at attractive levels.
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How will MySuper access infrastructure?
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JANA has been researching and advising clients on infrastructure investments since the mid-1990s, when it was
considered a new asset class.
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In infrastructure, valuation and a disciplined approach to entry are critical. We’ve carefully selected investments in
quality infrastructure asset funds and co-investments through three high quality managers.
AMP Community
Infrastructure
Fund
7.7%
QIC Global
Infrastructure
Fund
55.7%
Redpoint Global
Listed
Infrastructure
36.6%
Actual asset allocations as at 30 April 2017.
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While most of this exposure is unlisted, we have an allocation to a global listed infrastructure fund (via Redpoint).
Listed investments can be quickly implemented and provide cost efficiencies, liquidity and further diversification.
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The allocation to infrastructure provides the overall portfolio with diversification across global regions and
subsectors. The global infrastructure allocation is hedged to the Australian dollar.
Source: JANA Corporate Investment Services Limited.
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How may clients benefit?
Benefits of investing in infrastructure can
include:
• stable, predictable yield and scope for
moderate capital growth
• low correlation with other traditional
asset classes, such as shares and
bonds, which increases diversification
in a portfolio
• inflation protection
• franking credits for domestic assets,
and
• a long-term investment timeframe,
which is ideal for long-term investors.
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What is infrastructure?
Infrastructure are assets which:
• provide essential services to the
community
• display monopolistic characteristics
with high barriers to entry
• are capital intensive and typified by
stable income flows over a long-time
frame
• are commonly geared
• are typically long-term projects, and
• can either be listed or unlisted.
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Types of infrastructure assets
Infrastructure assets can be broken down into
two broad subsets – economic and social.
Generally, we consider economic assets to be
riskier than social infrastructure assets.
Typical examples of economic and social
infrastructure assets include:
Economic
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Toll roads
Airports
Utilities
Communication assets
Renewable energy
Social
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Roads (availability)
Education facilities (schools, universities)
Health facilities (hospitals)
Security (prisons, military)
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Listed vs unlisted infrastructure
We’re invested in listed and unlisted infrastructure.
Unlisted infrastructure
Benefits:
• Greater control over the decisionmaking process
• Access to more detailed information
• Ability to take longer-term investment
decisions
• Control of capital expenditure and
borrowing
Disadvantages:
• Illiquidity
• Potentially less diversification
• Similar to property, the very different
assets make benchmark selection
difficult
Listed infrastructure
Benefits:
• Liquidity
• Greater diversification
Disadvantages:
• Access only to publicly available
information
• Limited control over company strategy
• Correlation with global shares
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Key risks of investing in infrastructure
Key risks
Comments
Regulatory/political risk
Changes in government and the political environment can heighten
the regulatory risk associated with the asset.
General economic factors
(eg low GDP)
Volumes at airports, roads, seaports and other economic
infrastructure assets are often correlated to general economic
conditions.
Interest rate, gearing and refinancing risk
High nominal interest rates can raise the average cost of funding,
impacting overall returns. Changes in debt market conditions can also
impact the level of refinancing.
Project-specific risks
These may include construction risk, contract or counterparty risk.
Illiquidity risk
Unlisted infrastructure assets are generally considered illiquid, so they
tend to suit longer-term investors (10 years+). Internal portfolio
management can mitigate this risk.
Risk of impaired exit value at exit
This risk is more associated with closed-end funds which have a finite
life.
Specific unlisted infrastructure risks
These include valuation risk.
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Who are the managers?
QIC Global Infrastructure Fund
Core unlisted infrastructure; active-core investment strategy
About QIC
QIC is a Queensland government owned corporation created in 1991. QIC Global Infrastructure was established in 2006. Manager FUM is approx. $79b
(Dec 2016) across a range of asset classes.
The QIC infrastructure team has deployed approx. $7b (June 2016) of capital into 23 global infrastructure assets.
Investment approach
QIC has as active-core investment strategy. The strategy targets operationally mature infrastructure investments benefiting from active management,
stakeholder engagement and/or expansion opportunities.
QIC’s investment approach is sector driven, with deep industry knowledge. The fund focuses mainly on the energy, transport and Public-Private
Partnership (PPP)/social infrastructure sectors. The team develops a yearly investment plan which overlays QIC’s macro-economic views, the portfolio
targets and restrictions, and the available investment pipeline to identify key investment opportunities on a one- and three-year basis.
Geographic focus: OECD, 60% Australian/ 40% offshore (UK/Europe/North America).
Portfolio construction restrictions
Max non-Australian assets: 60% (hedged)
Single asset max: 20%
Sub debt max: 20%
Greenfield max: 10%
Holdings
As at March 2017, the portfolio held three assets:
• Lochard Energy (renamed from Iona Gas Storage)
• Powering Australia Renewables Fund (PARF)
• Port of Melbourne
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Who are the managers?
AMP Capital Community Infrastructure Fund
Social infrastructure, active asset management
About AMP
AMP Capital is a majority owned subsidiary of AMP Limited and began investing in direct infrastructure in the late 1980s. It’s infrastructure investment
team’s capabilities span research, origination and due diligence, transaction execution, asset management and portfolio construction and management. In
direct infrastructure, the team manages A$11.5bn (December 2016) in assets under management.
Investment objective
The fund aims to provide total returns (primarily income) of 10% pa before costs and taxes over the long term.
Investment approach
The fund invests in an unlisted portfolio of high quality PPP-style social infrastructure assets in Australia and New Zealand. The fund will seek to hedge any
New Zealand dollar exposure back to Australian dollars.
The fund focuses on assets within education, health, justice, defence, community housing, recreational facilities, transport and other social infrastructure
sectors where income from the assets is sourced primarily from governments, government-backed entities or similar high credit quality counterparties
under long-term concession contracts.
The fund maintains a conservative risk profile and primarily aims to invest in established, operational infrastructure assets, acquired in the secondary
market, where the size of the fund’s holding in assets is sufficient to allow the fund’s investment team to exert significant influence upon ongoing asset
operation.
The fund’s investment approach encompasses three key elements:
• deal sourcing
• portfolio diversification, and
• active asset management.
The fund maintains a borrowing facility which is used to fund asset acquisitions. It intends to limit any such borrowings to a maximum of 20% of the fund’s
gross value.
Holdings (at December 2016)
• Royal North Shore Hospital
• Victorian Desalination Plant
• AquaTower
• Eastern Goldfields Regional Prison
• SA Schools
• NSW Schools II
• Southbank Institute
• Victorian Schools
• Riverland Water
• South East Queensland Schools
• Darwin Convention Centre
• NZ Hospital Car Parks
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Who are the managers?
Redpoint Global Listed Infrastructure
Global listed infrastructure, enhanced index investment management
About Redpoint
Redpoint Investment Management is a boutique global equities manager based in Sydney. It is majority owned and managed by its investment staff, with the
remaining interest owned by the NAB Group. Redpoint was founded in 2011.
Investment objective
Aims to deliver a return (after fees) that exceeds the FTSE Developed Core Infrastructure Index (hedged to Australian dollars, net dividends reinvested) over rolling
5 year periods.
Investment approach
Redpoint’s method of choosing and weighting infrastructure companies is different from the benchmark’s. Redpoint believes it can capture the asset class returns
available more effectively from the wide range of investment opportunities around the world.
To meet the investment return objective, Redpoint:
• considers investments from a wider universe of companies than the benchmark
• holds companies that are not in the benchmark and excludes some companies that are, and
• often holds companies at significantly different weights to the benchmark.
Redpoint selects and weights companies according to two components: strategic and dynamic. The strategic component reflects the wider universe and ensures
the portfolio is not concentrated in a small number of larger capitalisation companies. The second stage is a dynamic component that involves an assessment of
each company.
Redpoint references a wide range of quantitative and qualitative data and information to analyse a company’s:
• dividend yield: higher dividend yields can help boost income from the portfolio’s investments
• financial leverage: Redpoint limits exposure to excessive leverage, and
• sustainability: Redpoint believes that managing the portfolio’s exposure to take into account certain labour standards and economic, environmental, social and
corporate governance factors can enhance long-term returns.
Indicative asset allocation ranges
• Australian infrastructure securities: 2%-6%
• International infrastructure securities (hedged): 92%-98%
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• Cash and cash equivalents: 0%-2%
For Plum investors:
MySuper’s new medium-term asset allocation
Sector
Australian shares
Global shares (unhedged)
Global shares (hedged)
Property
Global private equity
Infrastructure *
Growth alternatives
Old
27%
22%
3%
4%
4%
7%
• Insurance-related investments (hedged)
• Efficient beta
• Risk management overlay
Total growth
Defensive alternatives
New
27%
22%
3%
4%
4%
2%
7%
2%
3%
2%
67%
14%
Change
+2%
-
2%
3%
2%
69%
14%
-
+2%
-
• Global absolute return bonds
3%
3%
-
• Alternative beta strategy
3%
3%
-
• Extended credit
8%
8%
-
Fixed interest
15%
13%
-2%
Enhanced cash
4%
4%
-
Total defensive
Total
33%
100%
31%
100%
-2%
* Actual allocation to infrastructure is 0.25% (as at 30 April 2017)
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For MLC investors:
MySuper’s new asset allocation
Asset class
Australian shares
Global shares (unhedged)
Global shares (hedged)
Global property securities (hedged)
Unlisted property
Global private assets
Alternatives and other (growth)
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Insurance-related investments (hedged)
Efficient beta
Infrastructure *
Currency and derivative strategies
Total growth assets
Australian fixed income
Global fixed income
Enhanced cash
Alternatives and other (defensive)
• Global absolute return bonds
• Alternative beta strategy
• Non-investment grade bonds
Total defensive assets
Total
Old
27%
22%
3%
2%
2%
4%
7%
Target allocation
New
27%
22%
3%
2%
2%
4%
9%
2%
3%
0%
2%
2%
3%
2%
2%
67%
10%
5%
4%
14%
69%
9%
4%
4%
14%
3%
3%
8%
33%
100%
Change
+2%
+2%
-
+2%
-1%
-1%
-
3%
3%
8%
31%
100%
* Actual allocation to infrastructure is 0.25% (as at 30 April 2017)
2%
3%
2%
0%
70%
11%
7%
5%
7%
-
-2%
Benchmark asset
allocation
28%
17%
8%
1%
4%
5%
7%
5%
0%
2%
30%
100%
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