Analysis – Social infrastructure may lure risk-shy pension funds
LONDON (Reuters) – Pension funds may start investing some of their cash mountain now idling in low-yield government bonds into infrastructure, but only if they can find projects that are resistant to economic swings and bring immediate cash flows.
The idea that cash-strapped governments could seek help from pension funds, which control assets of $35 trillion (21.82 trillion pounds) globally, got a boost after Britain secured 2 billion funds from them last year for new projects by 2013.
But this is far short of a 20 billion target and many pension funds shy away from investing in infrastructure, even though they are ideally placed to bridge the funding gap left by banks which are forced to tighten lending to meet capital rules.
This is largely because pension funds prefer to stick to low-risk and low-yielding fixed income with the aim of better matching their assets with liabilities.
Possible infrastructure investments range from low-risk and stable public assets such as schools, hospitals and rail networks to those that have private-equity style risk profile and are highly leveraged.
But experts say pension funds are more interested in social infrastructure, including schools and hospitals, which are already built and give a stream of income paid by the state. This removes both construction and revenue risks.
The one that may not tempt them much is demand-based, economic infrastructure such as toll roads, airports and power generation, which are highly exposed to business cycles, leveraged in a private equity style and have revenue risks.
Social infrastructure may lure risk-shy pension funds
LONDON (Reuters) – Pension funds may start investing some of their cash mountain now idling in low-yield government bonds into infrastructure, but only if they can find projects that are resistant to economic swings and bring immediate cash flows.
The idea that cash-strapped governments could seek help from pension funds, which control assets of $35 trillion (22 trillion pounds) globally, got a boost after Britain secured 2 billion funds from them last year for new projects by 2013.
But this is far short of a 20 billion target and many pension funds shy away from investing in infrastructure, even though they are ideally placed to bridge the funding gap left by banks which are forced to tighten lending to meet capital rules.
This is largely because pension funds prefer to stick to low-risk and low-yielding fixed income with the aim of better matching their assets with liabilities.
Possible infrastructure investments range from low-risk and stable public assets such as schools, hospitals and rail networks to those that have private-equity style risk profile and are highly leveraged.
But experts say pension funds are more interested in social infrastructure, including schools and hospitals, which are already built and give a stream of income paid by the state. This removes both construction and revenue risks.
The one that may not tempt them much is demand-based, economic infrastructure such as toll roads, airports and power generation, which are highly exposed to business cycles, leveraged in a private equity style and have revenue risks.
Pension funds’ hedging dilemma: how do you hedge against risk your sponsor going bust? – Global Investing http://t.co/dWjXPq3C
Pension funds’ hedging dilemma
Pension funds have no shortage of concerns: their funding deficits are rapidly growing in the current low-return environment, and ageing populations are stretching their liabilities.
But a recent survey of pension funds trustees by French business school EDHEC has found that their biggest worry, cited by nearly 77% of the respondents, is the risk that their sponsor — the entity or employer that administers the pension plan for employees – could go bust. Yet 84% of respondents fail to manage the sponsor risk.
So how do you hedge against such a risk?
You could buy credit default swaps of the sponsor company or buy out-of-the-money equity put derivatives to seek protection. But both options are costly and illiquid. Moreover, it might send a negative signal to the market: after all, if the company’s pension fund is seen effectively shorting the company in an aggressive manner, investors may wonder “What do they know that we don’t?”
Erwan Boscher, head of Liability-Driven Investing and Fiduciary Management at AXA Investment Managers, says:
“Using market instruments like CDS and out of the money equity puts were suggested as a way of hedging sponsor risks, but we seldom see them implemented because of the cost, liquidity or reputational risks for the sponsor.”
EDHEC:no magic number to determine ratio of safe, liability-matching portfolio & risky performance-seeking one in Liability-Driven Investing
EDHEC research: sponsor risk (sponsors going bankrupt) is the biggest risk for pension funds
At EDHEC conference. +80% of UK pension funds in deficit. BT’s £2bln cash injection into p.fund stresses need to get risk management right
Quarter-end rebalancing: A myth? – Global Investing http://t.co/3Jcovwep
Quarter-end rebalancing: A myth?
With world stocks up more than 10 percent since the start of the year, it must be tempting for investors to cash in their gains before the quarter-end/fiscal year-end. Or is it really?
JP Morgan, which analysed equity buying of institutional investors including pension funds, insurance companies and investment funds in the United States, euro zone, Japan and the UK, finds that there is no empirical evidence of quarterly rebalancing by pension funds or insurance companies.
Below are the charts showing their findings on the amount of equity buying as a share of equity holdings in each quarter against the difference between equity return and the return on total assets. If pension funds and insurance companies do not rebalance at all, the amount of equity buying should be unaffected by the relative return of equities against total assets. And this is the result they found in Chart 1.
The regression line is horizontal suggesting no impact from returns to equity purchases.
Growth, debt nerves keep world stocks below recent highs
LONDON (Reuters) – World stocks remained below this week’s 8-month peak on Friday while demand for German government debt rose as concerns about Chinese and euro zone growth and a renewed focus on sovereign debt problems in Italy and Spain kept investors cautious.
Against a backdrop of slowing economies, Italy’s planned bond sales next week are already being touted as a possible flashpoint for the peripheral euro zone debt crisis. Growth is an essential component of plans by struggling euro zone countries to reduce high debt levels.
The MSCI world equity index .MIWD00000PUS was largely steady on the day, having hit its highest level in nearly 8 months earlier this week. The rally has stalled on the back of weak factory activity data in China and the euro zone, which has somewhat undermined faith in the pace of a global upturn.
“Global markets are taking a breather, anticipating large rebalancing outflows out of equities into fixed income, because the relative performance of equities has been very significant this quarter,” Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500 million of assets, said.
European stocks .FTEU3 were slightly lower on the day, while emerging stocks .MSCIEF fell 0.2 percent, led by falls in Shanghai .SSEC and Tokyo .N225.
Brent oil was up 0.5 percent at $123.74 a barrel, underpinned by worries that military conflict with Iran will hit supplies and create an oil price spike.
German government bund futures were up 20 ticks. These safe-haven assets for investors have rallied more than 150 ticks this week as the mood has soured, with optimism about the U.S. economy giving way to worries over a weak growth outlook in the euro zone.
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