A Peep into the Asset Allocation Psychology of Major Asset Owners I

Part I of III: Inflation and the Value of Real Assets

Whilst working on a project last year, I identified three main factors as having a long-term impact on the strategic allocation of major asset owners around the world[1]:

1)   Macroeconomic: The socialisation of consumer debt and excessive borrowing from governments have prompted intermittent quantitative easing actions, and intervention in currency markets to reduce pressure on currencies to appreciate.  In search of yield, asset owners are increasing their allocation to inflation-proof, “real” assets.  These include resources, real estate and infrastructure investments.

2)   Banks’ funding: Since the 2008 credit crisis, the asset-backed securities market, an important source of long term funding for banks, has shrunk considerably.  Competition for the remaining supply drives up the cost of long term funding.  At the same time, regulations on bank liquidity (e.g. Basel III) effectively impose constraints on using short term money to fund long term assets, exacerbated by uncertainty around future such regulation.  The consequence of these factors is increasing reluctance on the part of banks to finance long-term projects.  As the European sovereign crisis deepens and contagion risks increase, credit availability worldwide continues to tighten.  Long term focused asset owners can step in to fill this gap, as the investment nature of real estate and infrastructure projects can potentially match the investment time horizon of these investors.  They often provide a steady stream of cash flow that is inflation-linked; a good match for the liability driven and duration hedging strategies employed by pension funds and insurance companies.

3)   Social expectations.  General price inflation and widening income inequality have sparked demonstrations around the world (e.g. Occupy Wall Street).  Long term asset owners such as sovereign wealth funds, pension funds, and increasingly university endowment funds, are subject to social expectations to invest in the long-term well being of society using “the people’s money”.  Increasing popularity of mobile computing and the widespread use of social media provide ample venues for discussion of the social responsibility of major asset owners.

Coincidentally, one year on from the above analysis, we have seen strong evidence matching the above expectations.

1)   Macroeconomic:

Governments race to expand their balance sheets –

  • December 2011: The European Central Bank (“ECB”) introduced the three-year Long Term Refinancing Options (“LTRO”) scheme;
  • June 2011: The US Federal Reserve (“Fed”) extended the Operational Twist (“OT”) programme by US$267 billion;
  • October 2011: The Bank of England (“BoE”) expanded the quantitative easing (“QE”) programme from £200 billion to £275 billion;
  • July 2012: Germany’s courts dismissed motions that sought to block the European Stability Mechanism (“ESM”), albeit with conditions.  The BoE expanded its QE programme from £275 billion to £375 billion, and;
  • September 2012: “QE3” from the US Fed – the third round of asset buying since 2008 – committing US$40 billion monthly for an unlimited period.  One week after the Fed’s announcement, the Bank of Japan (“BoJ”) decided to enlarge its asset purchase programme to JPY 80 trillion (US$ 1 trillion).  This move weakens the JPY against the US$.

The QE race has fueled inflation expectations and increased demand for real assets. The prices of gold and silver have rallied since the summer after a secular six-month decline in the first half of this year.

The major downside of investing in resources and commodities from the perspective of asset owners such as pension funds and insurance companies is that the return on these investments comes from asset appreciation rather than from income generation.  This does not fit well with the asset and liability matching strategy that drives their asset allocation.  It is a capital preservation play.

Assets such as real estate and infrastructure projects, on the other hand, provide opportunities for both asset and income growth.  Given pessimism in developed markets and the contrasting rosy expectations of growth in emerging markets, the demand for emerging markets real estate has provided evidence for the yield pursuit of asset owners –

  • Dutch pension fund manager APG has acquired a stake in the developer Lemon Tree Hotels and entered into a Rs 20 billion (US$ 375 million) joint venture programme[2];
  • Hines, an international real estate company, has raised a €900 million retail property fund in Russia and Poland, with one third of the investments coming from institutional investors[3]; and
  • Fibra Uno (Bloomberg stock code FUNO11:MM), the first Mexican real estate investment trust (“REIT”), sold 9.2 billion pesos (US$700 million) of certificates in its second offering in May 2012.  International investors provided 46.9% of the subscription.  The share price of the REIT has increased steadily, by 32% yoy as of 21 September 2012 and 57% since launch in March 2011.[4]

Inflation is inevitable when abundant liquidity chases after a fixed pool of assets.  In Hong Kong, where the HK dollar is pegged with the US dollar, a single covered car parking space in Mei Foo, a local mid-market residential area, was sold for HK$600,000 (US$77,000) in August 2012.  The commercial rent in three main business districts – Mongkok, Causeway Bay and Central – has gone up 67%, 54% and 42% respectively year on year (“yoy”), compared to an average increase of 2.8% in the rest of Asia Pacific[5].   The rent in prime shopping areas of Hong Kong is now the highest in the world, and is almost double that compared to the first runner-up in a global ranking (Table 1):

Table 1: Global Rental Trend: based on Asking Rents (Per Square Foot/Year) as of Q2 2012

Country City / District Rent – Average asking price US$ per square foot (“psf”) p.a (2Q2012)
China Hong Kong 927
Beijing 404
Shanghai 368
Argentina Buenos Aires 500
Brazil Sao Paolo 309
US San Francisco, Bay Area 150
New York, Tri-state 150
Russia Moscow 372
UK London 279
Switzerland Zurich 255
France Paris 236

Source: Cushman & Lakefield 2012

Demand for infrastructure investments continues to rise –

  • February 2012: China Investment Corporation (“CIC”), China’s sovereign wealth fund, agreed in principle to invest in a UK national infrastructure plan under a private-public partnership (“PPP”).  It also acquired 8.7% of Thames Water in January 2012[6];
  • June 2012: AMP Capital raised €400 million (US$ 500 million) for its infrastructure subordinated debt fund, with a significant increase in investments from Asian pension funds[7];
  • July 2012: New Zealand Superannuation Fund committed NZ$ 100 million (US$80 million) to invest in China infrastructure projects[8];

It has been estimated that less than 1% of pension funds worldwide are invested in infrastructure projects (OECD 2011).  Bottlenecks that deter private investment include low, or a lack of, credit ratings of projects; and political, construction and governance risks throughout the lifetime of projects.  The PPP investment structure involving national governments and international organisations such as the International Finance Corporation (“IFC”) of the World Bank, or Asian Development Bank (“ADB”) is providing reassurance to support global syndications of infrastructure financing.

The National Association of Pension Funds (“NAPF”) and Pension Protection Fund in the UK are planning to launch a £2 billion Pension Infrastructure Platform (“PIP”) to pool and facilitate investments from pension funds from January 2013.  Banks have traditionally provided loans to these projects, such as roads and bridges, but as banks contract their balance sheets, alternative funding needs to be sought.  The UK government is expecting institutional investors to contribute significantly to a planned investment of £40 billion in infrastructure over the next three years[9]. With public borrowing by the UK government hitting record highs, tax revenue falling, and benefits payments rising in a slowing economy, investment from institutional investors sounds like a particularly good plan.  One might argue that this is a standalone case for the UK, but as we know, the UK is not alone in expanding its sovereign balance sheet whilst its banks are shrinking theirs.

This trend of pension funds stepping in to fill the role of long term financing is tied to the evolutionary impact of reduced bank funding for long term projects, the second point raised in the introductory paragraph of this blog.

Every megatrend in the economy is interconnected with another.  How are these trends developing?  What have the banks been going through since the subprime crisis?

See the upcoming Part II of this blog post.

Author: Christine Chow

Date: 24 September 2012


Cushman & Wakefield (2012) A Global Perspective of the Shopping Center Industry September 2012.

OECD (2011) Pension Funds Investment in Infrastructure OECD International Futures Programme: Project on Strategic Transport Infrastructure to 2030.   September 2011.




[1] The extract of this text comes from a market analysis conducted for a client of Homage Consulting.

[2] PTI (2012) APG to acquire a strategic stake in the Lemon Tree hotels, form joint venture The Economic Times 2 May 2012.

[3] Hines closes new €900m Russia, Poland fund Property Investor Europe News 23 May 2012.

[4] Fibra Uno (2012) Fibra Uno carries out its second offering of Real Estate Trust Certificates in the Mexican Stock Exchange Press Release 22 March 2012.

[5] Source: Hong Kong Property prices Hong Kong Economic Journal 20 September 2012.  Available at: http://www.hkej.com/template/property/php/detail.php?title_id=8740.  Accessed 24 September 2012.

[6] Walmsley S (2012) Chinese SWF sees euro-zone crisis as chance to snap up infrastructure assets IPE Real Estate 14 February 2012.

[7] Walmsley S (2012) Asian schemes ‘challenging’ Europeans for infrastructure IPE Real Estate 29 June 2012.

[8] Newell R (2012) NZ Super Fund commits NZ$100m to China Infrastructure Investment & Pensions Asia 18 July 2012.

[9] Redgrave J (2012) UK debt fund for pensions planned Financial Times 19 August 2012.


  1. (25 Sep 2012) An OECD poll of 52 large pension fund investors – including PGGM, ABP and Danish scheme ATP – showed 28 had invested in infrastructure primarily in a diversification trend the organisation described as “prudent” (source: IPE)

  2. (6 Nov 2012) Asian state funds are increasingly looking to make energy- and resource-related investments, particularly into mid-stream assets and energy infrastructure. They seek diversified, non-correlated, long-term and often inflation-hedging assets (source: Asian Investor)

  3. (4 Nov 2012) Pension fund investments in wind farms laying the ground for Wind ABS (source: Climate Bonds Initiative)

  4. (16 Dec 2012) The Economist magazine agrees (see The Economist: Embracing the Alternatives and Filling the bank-shaped hole)

  5. (16 Jan 2012) CIC plans to allocate more directly to real assets and property in 2013 (source: Asian investor)

  6. (14 Feb 2013) Points in this blog echoed by Gerard Lyons, Chief Economist and the Head of Global Research of Standard Chartered Bank (source: McKinsey & Co)

  7. (15 March 2013) Sovereign funds to boost their property, infrastructure exposure (source: IPA)

  8. (26 March 2013) The European Commission’s Green Paper on long term financing states that asset classes appropriate for long-term investment typically involve “patient” capital requiring “intrinsic project and implementation risk” (Source: IPE)

  9. (16 May 2013) PensionDenmark says public-private partnerships (“PPPs”) infrastructure projects offer members stable return (source: IPE)

  10. (18 Oct 2013) Greater Manchester Pension Fund takes stake in Airport City project (source: IPE)

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