Securing Retirement: Protecting and Growing Pension Fund Assets

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• On: 11/25/2024 11:28:58
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By: IFM Investors 

Market dynamics have become increasingly complex, with traditional asset class correlations higher than in previous decades. However, unlisted infrastructure has demonstrated long-term resilience across diverse economic conditions. Unlisted core infrastructure equity can be a compelling, low-correlation investment option for long-term investors. 

This is an excerpt from NCPERS Fall 2024 issue of PERSist.

Financial security is a primary goal for any retiree, which hinges on pension fund assets reliably meeting their liabilities. Preserving and growing these assets over long-term investment cycles is crucial to achieving this security.  

Perhaps more important today than in recent memory, investment portfolios need to be built for resilience across a range of outcomes. To navigate this challenging environment, some investors seek more tactical approaches, such as moving up the risk/return curve or increasing allocations to fixed income products. These options may be suitable depending on one's investment goals or risk appetite, but both bring added investment or volatility risk. 

Unlisted infrastructure, for one, can enhance portfolio resilience and deliver diversified, low correlation, risk-adjusted returns over extended periods of time. Its inherent characteristics – long-term, predictable revenue streams, performance through economic cycles and a differentiated risk/return profile – can make it a valuable addition to a portfolio. 

Further, investing directly in private assets allows for a deeper understanding of risks compared to listed markets. It may also provide some control and management of risks, as well as the ability to influence strategic outcomes. This deeper insight and control, in turn, enables more accurate pricing of assets and opportunities to capture upsides.  

Resilience through all seasons  
As market dynamics have become more complex, traditional asset class correlations are higher than they have been in prior decades. While listed equities have experienced increased volatility, bonds have not provided a reliable counterweight. Unlisted infrastructure, however, has shown long-term resilience across various economic environments. 
 
The below figure analysis from March 2010 to June 2023 demonstrates that unlisted infrastructure, represented by the MSCI Global Unlisted Infrastructure Index, consistently delivers returns across different economic scenarios, including varying levels of inflation, interest rates, and economic growth. In Figure 1, we analyzed varying returns from unlisted infrastructure, listed infrastructure, equities and bonds in four scenarios, combining high and low US GDP growth and CPI levels (measured relative to approximate average levels of 2%). 



Unlisted infrastructure's performance reflects the market's understanding of the inherent characteristics of infrastructure assets, which continue to provide value in various market environments. This value has its foundations in the essential nature of the services infrastructure provides to communities, including energy, transportation, and digital connectivity, as well as its secure market position, with high barriers to entry and a limited availability of substitutes. 

To learn more on this important topic, read our two-part series on the critical role of infrastructure in long-term, resilient portfolios: 

• Part One - The role of infrastructure in long-term resilient portfolios 
• Part Two - Making the most of an infrastructure allocation 

Building a robust portfolio 
Timing the market cycle for unlisted infrastructure investments can be challenging. The benefits of diversification come from building a target allocation over time, treating unlisted infrastructure as a buy-and-hold asset class for long-term investors. 
 
These long-term investments in unlisted infrastructure discount shorter-term macro risks, which often drive listed asset volatility without affecting the underlying drivers of their valuations. 

Thus, this historically stable performance through various parts of the cycle supports a long-term approach to this asset class.  
 
Given the uncertain macro and geopolitical outlook, portfolios need to be built for resilience across a range of outcomes, rather than simply focusing on investments that benefit from economic growth or those that potentially offer protection during downturns. A more sophisticated approach to portfolio diversification, both across and within asset classes, is needed to build portfolios that continue to perform well across changing macroeconomic and geopolitical environments.  

We see an opportunity for investors to be strategic and tactical in their allocations to maximize risk-adjusted returns. To this end, an allocation to unlisted infrastructure is a proven method of improving long-term, risk-adjusted portfolio performance.  
 
Financial security is the goal 
Equity investors and asset allocators face challenging times, with existing portfolio construction approaches under stress due to global economic challenges and megatrends that continue to play out. Against this backdrop, infrastructure offers an attractive opportunity for investors to improve the robustness of their portfolios and risk adjusted returns. Indeed, the asset class demonstrates a differentiated risk/return profile and portfolio resilience through various economic cycles and environments.  

For investors aiming to deliver positive long-term outcomes, a well-structured portfolio of high-quality unlisted infrastructure assets can enhance these outcomes. 

Disclosures: This article is provided for informational purposes only. It does not constitute an investment recommendation, offer or solicitation and should not be relied upon as investment advice or as the basis for any contract or commitment. This information does not constitute investment, legal, accounting, regulatory, taxation or other advice. IFM Investors Pty Ltd (“IFM Investors”) recommends that before making an investment decision, each prospective investor should consult a financial advisor and should consider whether any investments are appropriate considering their particular investment needs, objectives, and financial circumstances. Tax treatment depends on each prospective investor's individual circumstances and may be subject to change in the future. This information should not be reproduced without the written consent of IFM Investors. 

About IFM Investors: IFM Investors was established nearly 30 years ago by a consortium of Australian pension funds with the aim to invest, protect and grow the long-term retirement savings of working people. Our distinct ownership model aligns the interests of investors with assets that have the potential to offer long-term risk/reward characteristics and broad economic and social benefits to the community. As of June 30, 2024, IFM manages US$145.8 billion in assets across infrastructure, debt, listed and private equity for 717 clients and 120+ million people. 

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