Pension officials get infrastructure pitch, consider other new investments

    Rick Miller, chairman of OMERS, shared his fund's experience investing in infrastructure. Photo courtesy of OMERS.

    New York City – Officials from state and local pension funds from around the country heard about alternative investments at their trade group’s annual meeting, including infrastructure and small companies in developing countries.

    The National Conference on Public Employee Retirement Systems hosted a panel on investing in infrastructure Monday, but audience members asked more than one question critical of the idea.

    Sonia Axter, managing director of infrastructure investments for Ullico, said infrastructure includes many different kinds of investments, including utilities, bridges, rail projects, schools and hospitals. Ullico, the company Axter works for, is owned by unions.

    She said infrastructure investments are often done using P3 agreements or public-private partnerships. She said some people talk about P4s, adding pensions to the list.

    Axter said American infrastructure is deteriorating and needs new investments, tying the topic to the conference’s theme, “rebuilding America.”

    She said infrastructure investments have characteristics attractive to pension funds, like their long maturities and predictable cash flows.

    “The need is so great,” Axter said, pension funds are opening up to infrastructure investments.

    Rick Miller, chairman of the Ontario Municipal Retirement System, gave some examples of OMERS success investing in infrastructure “trophy assets.”

    Miller said the infrastructure asset class “basically didn’t exist” in 1997 when OMERS first invested.

    He said his $55 billion fund was able to buy a 25 percent stake in an $8 billion infrastructure joint venture with the Ontario teacher’s pension fund and a private investor.

    Miller said his fund sees rates of return of about 10 percent on infrastructure investments. He said infrastructure investments feature:

    • Returns between fixed income and equities
    • Predictable cash flows
    • Low volatility
    • Increased charges/service fees which keep up with inflation
    • Long-term cash flow

    More than one questioner asked about infrastructure investments leading to lost jobs for public employees who belong to their pension funds.

    Michael Musuraca, a former union official now with Blue Wolf Capital Management, advised against privatizing infrastructure just to save money.

    He said pensions that invest “have the ability to call the tune” when it comes to labor policies.

    Miller said his fund won a bid to take over a hospital, but declined to proceed when the local government asked to void the existing collective bargaining agreement.

    “We haven’t eliminated jobs,” he said. “We’ve added jobs.”

    Miller said funds need to consider political risk, geographic risk and question all the assumptions used in projecting the returns of infrastructure investments. Musuraca said pension funds should look to diversify by sharing projects with other plans.

    At another panel on new investment ideas, Stephen Derkash of UBS Global Asset Management and Stephanie Braming of William Blair & Company urged pension funds to invest in small companies in developing countries, an area known as emerging market small cap stocks, to take advantage of the growing middle class abroad.

    Small cap – short for capitalization – stocks are defined as companies with market values below $5 billion.

    Braming said funds should consider having about 35 percent of equity investments in international stocks. Of that amount, she said funds should put 35 percent into emerging market small cap companies.

    Derkash said Odontoprev is an attractive Brazilian company because employers are adding its dental insurance products to compete in tightening labor markets.

    Braming gave two examples of successful companies, Life Healthcare and Jubilant Foodworks. Life Healthcare is a large hospital system in South Africa. Jubilant is the Domino’s Pizza franchisee in India and it will soon begin to franchise Dunkin’ Donuts there, too.