Infrastructure and real estate have benefits that go beyond their returns, writes Laura MacPhee
If someone asked you to imagine an equity, I think it’s fair to say you would struggle. You may have ideas about the companies you would be investing in but it would be hard to picture the actual shares.
Now replace the word “equity” with “property” and the task becomes much easier. Likewise forms of infrastructure like a toll road or harbour would spring readily to mind. Both real estate and infrastructure fall within the category of tangible assets, which literally means they can be touched (unlike the more nebulous equities and bonds).
Members can relate to tangible assets because they encounter them in their daily lives. Meanwhile, as index-linked gilts have become more expensive, pension schemes are looking further afield in the search for attractive and predictable returns.
“Pension funds are thinking differently – not “I want x in equities, x in emerging markets”. They are becoming more open to opportunities that just seem like plain good ideas,” says Jo Waldron, a client director in asset manager M&G’s alternative credit team. Schemes are especially attracted to assets that are linked to inflation – but there aren’t that many out there, says Waldron.
Schemes are increasingly turning to real estate and infrastructure to take advantage of their relatively low volatility and often inflation-linked returns. Such types of investmenthave the additional advantage of being more readily comprehensible to members. They could even potentially boost member engagement.
“Ultimately infrastructure for us is a low volatility asset class, which can generate attractive returns for clients,” says David Curtis, head of UK institutional business at Goldman Sachs Asset Management. “It’s often about investing in assets that have regular income in the form of dividends, or income which is inflation linked because ultimately the charging mechanism for some of these infrastructure ventures might have an inflation component to it”.
Tangible investments may be particularly attractive to schemes which are maturing, says Curtis, because they “can pursue a more robust, low risk, investment strategy, because they’re confident about reducing their deficit”.
So there is a strong investment case for schemes to invest in real estate and infrastructure, but they can also give trustees and pensions managers a hand when it comes to communications. If members can visualise the assets they are investing in they are more likely to engage with them and take an interest in the outcomes and returns.
The same theory can be extended to pensions more generally. That thinking underpins some new communications strategies which are coming to the fore. Teach people about pensions in reference to experiences they understand - the idea is simple, so it seems surprising that it hasn’t taken off sooner.
One programme which communications specialists AHC have created lets members see their contributions and investment returns increase by representing them as a house being built. Everyone knows what a house is supposed to look like, so savers can easily see how far off the mark they are and how much more they need to contribute to reach their goals.
This new technology brings members in line with their asset managers – members are building properties while their managers invest in them.
As pension schemes increasingly look to alternatives to meet their investment goals they should always be looking for engagement opportunities. They can then harness the power of the imagination to inspire action.