US - The Fresno County Employees Retirement Association (FCERA) may axe its allocation to infrastructure and divert the funds into a commodities portfolio if the board of trustees approves the change at a meeting tomorrow.
FCERA's general consultant Wurts & Associates said the dearth of credit in the markets has made infrastructure an unattractive investment option. Also, the extent to which private capital will be used for public projects remains uncertain while political and financial issues have recently derailed high-profile projects.
If the move is approved, FCERA would increase its allocation to commodities to 3% of its US$2bn portfolio, up from 1%, and terminate its allocation to infrastructure.
Wurts president and chief executive Jeffrey MacLean wrote in a memo to the board: "As the availability of debt has fallen and the cost thereof has increased materially, Wurts & Associates has concerns regarding the ability of infrastructure to meet required return expectations."
He added: "In addition, there has been a significant amount of undrawn capital raised recently for infrastructure which we believe will increase competition for assets and may place further downward pressure on expected returns, at least without incurring even further leverage."
There is currently over $90bn in infrastructure funds in the market seeking capital, MacLean wrote in his memo, citing data from Preqin.
He also said the players in the industry are in flux as investment banks, which have been major participants in infrastructure projects, could restructure their business models to focus more on conventional commercial banking.
"A heightened level of scrutiny surrounds infrastructure units owned by large financial institutions," he said.
Last year, the pension fund approved a real asset allocation target of 11% of the total portfolio that included investments in real estate, Treasury Inflation-Protected Securities, infrastructure and commodities.
MacLean said an exposure to passive commodities will provide inflation protection through investments that are more liquid than infrastructure. Wurts recommends a diversified passive approach to investing in commodities.
Separately, at its July 15 board meeting, FCERA hired Metropolitan West to run a $40m Term Asset-Backed Securities Lending Facility (TALF) mandate. The scheme had previously hired Pacific Investment Management Co. to run a $100m TALF portfolio, but PIMCO said it could only take on $60m of the scheme's assets. (Global Pensions; July 13, 2009)
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