Major pension funds are steering big dollars to infrastructure

Major U.S. pension funds are increasingly turning to infrastructure for its solid risk-adjusted return profile and strong performance resilience.

Since 2011, Pensions & Investments has tracked more than 950 infrastructures hires totaling more than $134 billion committed, paced by 148 hires and $17.7 billion committed in 2021.

Maine Public Employees Retirement System, Augusta, is also drawn to infrastructure due to its ability provide diversification from the plan's public and private equity and fixed-income assets, said William Proom, managing director of investments who oversees the fund's infrastructure investing efforts.

The $18.2 billion fund has been investing in infrastructure for 15 years and currently has a 10% allocation to the asset class. It prefers to invest with generalist managers that "can pick and choose across all of the infrastructure sectors in order to select the most attractive risk-adjusted opportunities available," Mr. Proom said.

Given MainePERS' focus on generalist infrastructure managers, Mr. Proom said its portfolio is well diversified across all six sectors that currently comprise the infrastructure universe: telecommunications, energy and energy transition, transportation and logistics, power and utilities, and social and environmental. Between 2006 and 2022, 43% of the money MainePERS invested in infrastructure went to energy and energy transition, Mr. Proom added.

While MainePERS does not currently invest with a manager executing a specific renewables strategy, the plan has exposure to renewables through generalist funds, CIO James Bennett said.

Mr. Bennett added, "We are hearing from our generalist funds that renewables are becoming more attractive and we are seeing higher proportions of those in funds today than we did five to 10 years ago."

MainePERS will continue to evaluate the "growing number of players who are focused exclusively in the energy transition area," Mr. Proom said. "And as they build a track record and exhibit expertise across a wide swath of the energy transition landscape, we will be more and more seriously evaluating those types of commitments."

The $64.4 billion pension Maryland State Retirement & Pension System, Baltimore, is in the midst of a multiyear plan to steer more dollars into infrastructure. The fund plans to allocate 4% of its capital to infrastructure by 2026 and since April 2022 has committed more than $700 million to the sector, said Danita Johnson, the fund's managing director of real assets.

"We're looking for cash yield, strong inflation-linkage assets that are not correlated to other sectors and to build a portfolio across core, core-plus, value-add and opportunistic," Ms. Johnson said. "But the focus will be core-plus and value-add."

The shift in strategy comes after a 2021 asset allocation review with help from Meketa Investment Group, the fund's investment consultant, that found infrastructure assets performed well in all climate scenarios, like whether the U.S. transitions to renewable energies or if it institutes some kind of carbon tax, Maryland's CIO Andrew C. Palmer said.

"This was a longer-term play for us," Mr. Palmer added. "What we're trying to do is build portfolios in methodical ways and so we've got a pacing plan, we want to be exposed to different vintage years. There's no dislocation in prices in those markets that we want to accelerate getting exposure; they're still pretty orderly."

Prior to the 2021 review, Maryland had a 1.6% allocation to infrastructure, mostly in private energy infrastructure funds such as pipelines and the rest in passive public market infrastructure equity, Mr. Palmer said. Since the review, Maryland has targeted broad infrastructure funds with a mix of energy, communications and transportation assets, Mr. Palmer added.

"In the future, we see potential for investing in digital and energy transition focused-funds...but that may change as markets evolve over the next year or two that we spend looking for multisector managers," he said.