It’s a dismal time for fixed-income investors. Negative yields are rampant. German 10-year yields recently fell below zero for the first time ever and Japanese 10-year yields have dipped to record lows. All told, more than $10 trillion in government debt has negative yields today. Some pundits believe that U.S. yields might not be far behind. The U.K. vote to leave the European Union has only made this picture more complex.
What is an institutional investor — who must find a way to make good on long-term promises in what looks like a very low-yield environment for the foreseeable future — to do?
The answer comes from some of the most successful institutional investors: It is time to “reframe their time frame.” This means that instead of thinking about short-term yield, institutional investors should think about time. Investors should ask themselves: If you need to allocate some funds to the 40-year bucket, what should those assets be? Once the question is reframed that way, the answers can begin to look quite a bit different.
The most important outcome of this shift in perspective is that investments in long-term infrastructure can start to look much more attractive and strategic. Once an investor decides to get into this sector, the question becomes at what stage to invest: “up and running” or early stage? The problem is, once a piece of infrastructure is up and running, many investors that want real assets compete to buy it. Since there are more real-asset-seeking investors every day as yields in public equity markets become ever more volatile and yields in debt markets dry up, the prices of “up and running” assets go up and yields go down as well.