Infrastructure poised to take up larger chunk of super portfolios

Infrastructure has been touted as a potential winner in the year ahead as it benefits from a global move towards rate cuts; however, an investment executive has suggested infrastructure is already an established trend among super funds.

According to APRA’s latest quarterly statistics, there’s a growing trend among industry funds towards infrastructure investments, with approximately 11 per cent allocated to this asset class as of March 2024, of which 9.8 per cent is directed specifically to unlisted infrastructure.

In comparison, public sector funds hold 7.8 per cent in infrastructure, while retail funds and corporate funds hold 3.8 per cent and 5.2 per cent in the asset class, respectively.

According to Simon Hudson, joint investment officer at superannuation-focused asset manager Playfair Asset Management, infrastructure is likely to play a larger role in portfolios moving forward.

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“The risk/return profile of high-quality infrastructure assets can be incredibly well aligned to that of a super fund,” he told Super Review.

A typical super fund targets a return of CPI plus 3 per cent, he said, and for the average balanced fund, this translates to a target of around 5–7 per cent per annum.

“A lot of the returns of high-quality infrastructure assets are pretty reliable in delivering that. Also, with the long-term nature of some of these assets – their profiles are for 20–30 years – that’s perfect for a super fund,” he said.

However, funds face the dilemma of finding high-quality assets, Hudson said, and are therefore willing to meet “very high” multiples to obtain them.

“That’s why you’re seeing a lot of pension funds around the world paying very high multiples, particularly in unlisted infrastructure, for what they perceive as very high-quality assets. For example, ports around the world,” he said.

A number of funds include ports among their key portfolio holdings, such as Australia’s largest super fund AustralianSuper, which holds a 32 per cent interest in Peel Ports Group, the UK’s second-largest ports group.

Similarly, IFM Investors, which manages $108.8 billion for its 686 institutional investors, including its 17 Australian industry super fund owners, holds investments in the Port of Brisbane in Queensland and Port Botany and Port Kembla in NSW, among others.

But, Hudson said, not all ports hold the same promise, observing that some can hold a fair amount of operating risk and uncertainty.

“It’s not dissimilar with credit, in so far as there’s high-quality credit and low-quality credit, and you’ve got to be very careful with what you’re buying,” he said.

Other popular infrastructure assets include airports, as evidenced by the $32 billion acquisition of Sydney Airport in 2022 by a consortium of funds including Australian Retirement Trust and UniSuper; and toll roads, with the Future Fund acquiring a stake in ConnectEast Group, owner of the largest toll road network in Victoria, last month.

For Hudson, this strong appetite for infrastructure is unlikely to go away any time soon.

“Even with interest rates having moved up quite significantly, a lot of the multiples being paid for quality unlisted infrastructure assets are still very strong, as there’s underlying demand,” he said.

“I don’t see that underlying demand falling away any time soon. Quite the contrary in fact.”

Earlier this year, IFM Investors also termed infrastructure the “new portfolio cornerstone”.

It said private pension funds remain underinvested in infrastructure relative to their targets, signalling a significant wave of potential new investments to come.

Generating income

Super funds have increasingly been urged to prepare for a further 3 million members becoming eligible to draw from their super in the next 10 years, forcing funds to deeply consider the income-generating capabilities of their strategies.

According to Treasury’s 2023 Intergenerational Report, drawdowns are estimated to rise from around 2.4 per cent of GDP in 2022–23 to 5.6 per cent of GDP in 2062–63.

Meanwhile, the proportion of people with accounts in the retirement phase will increase from 8 per cent in 2022–23 to 19 per cent in 2062–63.

“If you think of all the pension funds around the world, even if you have a membership base where the average age is, say, 50 years old, a lot of the members will live till well past 80, so pension funds need that certainty of return profile and also the duration,” Hudson said.

With this, he said, infrastructure assets could offer an ideal proposition to address long-term income returns.

“Income is going to become more important in the future, not less, because of the ageing population,” he said.

The Canadian pension fund industry, which is far more mature than Australia’s system, was “on top of this 20 years ago”, he said, adding that this drove them to invest heavily in infrastructure globally.