Since the Japanese ‘bubble economy’ burst at the end of the 1980s, it has seen sub-par growth, recessions, deflation and a secular bear market in shares and property. These events have had a lasting impact on the funds management industry and on the long-term asset allocation strategies of Japanese institutional investors. On the one hand, it has promoted more cautious investment strategies and a greater focus on portfolio risk management. On the other hand, the prolonged low-yield environment has heightened the need for return-enhancing strategies and increased the appetite for infrastructure assets amongst Japanese investors.
Today, Japan’s asset management industry is on a new growth phase; its AUM (approaching 500 trillion yen) and asset management revenues both surpassed their 2007 peaks in 2016 and are likely to keep growing.
Japanese institutional investors typically have longer term liabilities and over the last decade have been looking for new sources of long-term, inflation-protected returns. They represent a potentially major source of long-term financing for infrastructure assets.
This article examines the factors that we believe will result in Japanese investors increasingly allocating to infrastructure assets.
Japanese pension funds will continue to increase their allocation to infrastructure
Japan’s economy has been stagnant and investment returns have been typically low. The Japanese Government is making a conscious effort to encourage investors to diversify their investment base. Japanese investors are now looking for investments outside of Japan across a range of asset classes. In alternatives, an increasing number of Japanese corporate pension funds are investing into infrastructure, across both equity and debt.
Larger investors such as public pension plans and financial institutions (namely insurance companies) are also changing their processes to assess the risk involved in alternatives and making allocations to the infrastructure asset class.
3 factors driving the interest in global listed infrastructure assets
The Japanese retail market has been an early adopter of global listed infrastructure and this has seen the success of several large retail funds. Retail interest is now beginning to broaden to the institutional and pension market.
- Access to direct investments: Direct infrastructure allocations may not be attainable (or not in a timely fashion). Institutional investors may find it difficult to deploy the required capital in the direct market due to the increased amount of capital being raised and the limited number of assets for sale in the market.
- Market size: The direct infrastructure market is significantly smaller compared to the US$2.3 trillion size of the global listed infrastructure sector which had tripled in size over the past 13 years. This has led many funds to make investments in listed infrastructure in order to gain more immediate exposure to the sector with the aim that they can then drawdown funds from their listed allocation as and when they find direct opportunities.
- The need for liquidity: The need for liquidity is an important consideration for many public pension funds. Pension funds that are positive on the outlook for real asset investments but require higher liquidity in their funds are increasingly looking at listed infrastructure as it provides exposure to the same growth opportunities in infrastructure while also offering the daily liquidity required to manage their overall portfolio needs.
The global listed infrastructure sector is highly fragmented and still maturing. Interestingly, only about 3% of the US$2.3 trillion currently invested in global listed infrastructure is managed by dedicated infrastructure specialists.
As a point of comparison, 30% of the US$1.5 trillion invested in global listed real estate is managed by dedicated investment professionals. The potential for greater market efficiency presents opportunities for early investors.
Outlook for infrastructure assets
AMP Capital expects infrastructure pricing trends in 2017 will continue to reflect the investor hunt for yield. In a ‘lower for longer’ interest rate environment, infrastructure assets where cash yield (as opposed to capital growth) constitutes a high proportion of return will continue to be highly priced, particularly in the core infrastructure space.
Our focus remains on the mid-market, with sector, geography and ticket size (level of equity relative to debt) the three key elements we consider in the search for high-quality assets.
Over the next three-to-five-years we do not expect Japanese investors will become direct investors (like Canadian or Australian big institutional investors). Rather, they will continue to invest through fund managers.
The income stream from infrastructure assets will continue to be favoured by Japanese investors, and will also be sought by long-term asset allocators as a diversifier of risk in portfolio construction.
As Japanese investors increasingly look to alternatives, we expect Japanese pension funds will continue to increase their allocation to both listed and direct infrastructure.
Manish Aggarwal, Investment and Operationals Principal - Direct Infrastructure Equity
Johnathan Reyes, Portfolio Manager/Analyst - Global Listed Infrastructure
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