Updated with correction
Canada's large public defined benefit plans are pioneers in direct infrastructure investing, and now it's the turn of their neighbors to the south to follow suit, said a scholar at Stanford University.
U.S. public DB plans “have a deeply rooted agency capitalism in this business,” Jill Eicher, pension infrastructure collaborative program director at Stanford's Global Project Center, said during a presentation May 22 at the Government Finance Officers Association's annual conference in Toronto. But she questioned why plans are willing to pay more for an outside money manager, rather than paying for talent “to manage infrastructure internally at a lower cost.”
Ms. Eicher said the Canadian example is one for U.S. public plans to follow because the higher returns from direct investment come at a lower cost. She said annual reports from the C$278.9 billion ($215.5 billion) Canada Pension Plan Investment Board, C$171.4 billion Ontario Teachers' Pension Plan and C$77 billion Ontario Municipal Employees' Retirement System showed direct infrastructure returns ranged from 16.5% to 21.4% in 2015. U.S. plans, however, using third-party money managers, returned closer to the MSCI Global Infrastructure index's -5.4%.
Meanwhile, annual fees for standard third-party infrastructure managers ran from 1.5% to 2%, while asset owners managing infrastructure internally, including the Canadian plans, averaged costs from 0.3% to 0.5%, even with paying higher salaries to in-house infrastructure specialists, Ms. Eicher said, citing data published by Keith Ambachtsheer, director emeritus of the Rotman International Center for Pension Management at the University of Toronto.
Along with lower costs and improved performance, benefits to U.S. plans that move into direct investment are access to better investment opportunities and control over the actual investments, with easier access to liquidity if needed as opposed to assets possibly being locked in a third-party portfolio, she said.
Ms. Eicher noted U.S. public retirement plans face challenges in moving to direct infrastructure investment, particularly in regard to scale. She said plans other than the largest U.S. plans like the $290.4 billion California Public Employees' Retirement System, would have issues with having enough assets to successfully find good investment targets. A solution, she added, would be to pool their infrastructure assets not with money managers but through co-investments with other public plans with similar investment strategies.
“The lack of cooperation is costly to them, since the model for infrastructure is increasingly rewarding scale,” Ms. Eicher said. “You need like-minded investors to combine their strategies and pool their assets to cooperate on finding good investments.”
There have been some success stories with U.S. plans' direct investments, Ms. Eicher said, such as CalPERS' 10% equity stake in the Indiana Toll Road Concession Co. LLC, which operates the Indiana Toll Road and a recent partnership between the $186.8 billion California State Teachers' Retirement System and APG Group, the Dutch money manager that is owned by the e402 billion ($454.4 billion) Stichting Pensioenfonds ABP.
She also pointed to states with single boards that manage a variety of assets from several public plans, notably the $80 billion Minnesota State Board of Investment, as an example of successfully pooling pension assets. “It works there on a broad scale, and it could work with infrastructure,” she said.