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Jan Ptacin

Why Infrastructure May Be the ‘Perfect Institutional Asset Class’

This article summarises the recent episode with David Neal, Chief Executive of IFM Investors, and includes sections on what makes the effective CIO, on how and why IFM Investors was born, on how the investment performance is judged and benchmarking as well as on investing in infrastructure. Further, the article includes a section on fixed income as an asset class, a section on portfolio creation as well as a section on achieving a productive culture in an organisation.

David Neal is the Chief Executive of IFM Investors having studied Electronic and Structural Engineering at Oxford University. Before IFM Investors David Neal was the CIO and later Chief Executive at Australia’s Future Fund, Australia’s sovereign wealth fund. Prior to Future Fund, David Neal held the position of Head of Investment Consulting at Willis Towers Watson Australia.

What Makes the Effective CIO? 

Neal firstly states that probably the most important part of being a CIO is ‘to be really strong in their own mind’. Neal further suggests that an important thing for a CIO is to have one’s own edge and to use it to the fullest by staying true to the edge and building the team around that edge. 

As a second important thing for a CIO Neal states the ability to build a team of specialist experts and make the team work together as a ‘joined-up whole’. Using Neal’s words ‘Global investing across all asset classes, which is what asset owners have to do, is inherently a collection of deep specialisms that you have to bring together’. Neal explains that ultimately the challenge is to combine into one portfolio these different specialisms in order to achieve the fund’s long-term objectives. 

How and Why IFM Investors was Born? 

The initial idea of IFM Investor’s Australian founders was to do investments in Australian infrastructure and other growing Australian companies. 

“The wonderful way I've heard it described is to give the members, the nurses, the teachers, the construction workers, hospitality workers of these industry superannuation funds, to give those members essentially the opportunity to invest as though they are millionaires or billionaires so they can get stakes in complex businesses.” 

Neal gives the example of Sydney Airport as a complex business that IFM have acquired and in which a typical person would not be able to get a stake otherwise. Neil explains that while the business has grown since, it is still wholly owned by 17 Australian superannuation funds. He further explains that about 15 years ago the business was opened up to other funds ‘not to own the business but to invest alongside the owners’ and that as of now the business has 650 institutional investors investing alongside its owners. 

Judging Investment Performance and Benchmarking 

Neal emphasizes the importance of long-term return as a key metric for measuring the success of investments: 

“Two-thirds of our funds under management are sourced from our owners. It's very clear to them that returns is first, second and third priority, and a flow of dividends is pretty modest in the context of the returns that we generate for them on their assets. So it's absolutely about investment performance. Probably the one sub-note to that is that it's not just about the return that we generate, it's also about how we generate it.” 

Neal further discusses the importance of being community-minded in their investments so caring about the planet and the people given that IFM’s owners ‘are millions of working people’. Neal explains that in fact everything they do as an investor has ‘to look at the world through their eyes and their perspective.’ So, while stressing the importance of returns Neal also highlights that they have to be achieved in a responsible way by being a careful steward of assets. 

On benchmarking, Neal discusses that ‘we are targeting long-term absolute returns and trying to build diverse portfolios that minimise the risk of losing any money’. He explains that in fact that is also the nature of the infrastructure asset class and thus the portfolio that they manage. He further explains that IFM has some products managed against a benchmark and some more against absolute return. 

Investing in Infrastructure 

Neal firstly highlights that while there are only some 34 assets worldwide, they actually represent ‘more like 190 underlying assets.’ Neal then highlights that infrastructure in many ways seems to be the ideal institutional asset class for several different reasons one of which ‘is that it has wonderful long-term characteristics.’ Furthermore, as Neal explains almost all the cash flows underpinning infrastructure assets ‘are inflation related’. 

“So you can be confident that over a very long period of time, your purchasing power is maintained, which at the end of the day is the first and most important objective of long-term investing. There's no point investing for the long term and then finding that your purchasing power has declined.”

Furthermore, Neal emphasizes that as infrastructure assets are essential assets, they are still going to generate cash flows even in tough economic times. ‘So you've got this confidence in long-term real returns and a very high level of resilience through short-term cycles.’ In addition, Neal explains that as there are very high barriers to entry in the infrastructure asset class this helps generate stable real returns. However, he also notes that it is the case that ‘these are extremely complex businesses that require obviously the skills and resources to not only buy but manage well.’

Neal explains that while the dispersion of returns in the infrastructure asset class is generally low by the nature of infrastructure as an asset class, during the pandemic for a while the dispersion did get much larger. He explains that ‘in a way, it was a phenomenal test for true diversification in a portfolio.’ 

“Because who could have predicted that the revenues for one of your sub-sectors would drop to zero in what is supposed to be a highly resilient asset class? But of course, in a pandemic, airports became parking lots of planes, and there was no revenue, literally no revenue. Nobody was parking in the car parks, nobody was in the shops, nobody was taking off on airplanes.” 

Neal explains that when you put the two together the overall portfolio due to its diversification appeared relatively ‘unscathed’. Neal, therefore, highlights the importance of diversification across cash flow types and across sectors.  

Neal explains that at IFM they believe in both transitioning the old infrastructure assets by reducing emissions but also and crucially in building new infrastructure that is required for a net zero world. The latter includes updating the grid ‘to deal with the electrification of everything’, building infrastructure that supports the new fuels such as biofuels or hydrogen as well as the infrastructure that is required for carbon capture. 

“So there was a shift in our habits, and it just meant that instead, the infrastructure that allows goods to move did very well, whilst the infrastructure that moves people did not do well.”


“In terms of debt, we would think of ourselves more as a credit manager than a fixed income manager, if you like. So the nature of our strategies is much more around how can we add value from intense detailed assessment of underlying credits, private credits. So we do that.”

Neal explains that IFM has got a very broad credit portfolio in Australia and that they have globalised an infrastructure debt capability where experts on infrastructure give them a great insight. Neal further discusses the great potential of this asset class as ‘you're managing to get returns that are equivalent often to the equity returns on a lot of investments now from the credit side’. 

In Neal’s words ‘any active credit manager has to have their own view of the credit worthiness. That's the point’. Neil explains that IFM is essentially looking at when the credit rating agencies have not got it right. Neil further emphasizes that often in the infrastructure asset class ‘these are really complex investments that require very bespoke analysis.’ He adds that fixed income infrastructure investments often require a pool of investors to come together in a consortium to lend and that often the credit rating agencies would not apply the same level of resource to such investments. 

On Portfolio Creation

Neal, firstly, emphasizes that the portfolio needs a small number of investments where the allocator has taken a risk by taking a view in order to generate alpha. However, he stresses that ‘you need to have very high conviction you've got the right idea.’

“If you're building a portfolio whose role is to fill a strategic role in a portfolio, and I think that's generally where infrastructure lies, I talked about those long-term inflation-related characteristics, then I think you're looking for something that will reliably deliver on that.” 

In such a scenario, Neal stresses, one is looking for a more diversified portfolio spread across geographies and sub-sectors. Neal then highlights that ‘how concentrated should a portfolio be goes to what is the purpose of the portfolio in your total mix.’

Achieving a Productive Culture 

Neal points to the importance of purpose in an organisation. He says that it is a priority for him that ‘everybody understands whose money it is that we manage, to really drive home that member-centric culture’. 

“I want people to come in every morning and remember that it's nurses' money, it's teachers' money, its construction workers' money, its hospitality workers’, but it's not our money. “

Neal states this create a culture of excellence wherein everybody wants to do their best job since the assets that IFM manages can make a significant difference to somebody’s retirement. Neal further explains that this purpose also instils a sense of responsibility as when being community minded ‘these aren't just numbers on spreadsheets, you naturally have a sense of wellbeing that becomes important, and that matters internally.’ Neal adds that in essence he wants a culture where people care for each other. 

… “It’s very powerful to have people walk down the street on their way into an IFM office and to be able to think these people that are walking past me, it's their money that I'm managing.”

By Jan Ptacin. Jan is currently a third-year student at Durham University studying PPE. Outside of his degree Jan is interested in investing, having been a team leader of a team which reached a global final of an investment competition organised by KWHS in high school. He also enjoys art, hiking and fine wine as hobbies. 

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