LACERS BOARD UPDATE
By Michael R. Wilkinson, LACERS Commissioner
The LACERS Board of Administration recently received training in infrastructure investing from its general investment consultant, NEPC, LLC. This is the first step that the Board is taking before making any decision on starting infrastructure investing.
As you know, the overall investment philosophy is incorporated in the Board’s decision to allocate its investments using Board-level decisions on what type of assets the plan should invest in keeping in mind the total investment return as compared to risk. This is the asset allocation process.
What is infrastructure, you ask? Infrastructure is defined as the structures and facilities needed for the operation of society or companies. Some examples are toll roads, airports, fiber optic networks, the electricity grid, and the list goes on.
What are some of the advantages of infrastructure investing? 1) Income. It has a predictable cash flow. 2) Inflation protection. Returns frequently go up with inflation. Some are monopolistic assets that are hard to compete with (think airports and toll roads). 3) Infrastructure also has low correlation to other investment classes. This means when the other investment classes go down, infrastructure may not and may even go up.
Considering this, you might ask if this investment class is so great, why don’t we put all our money here? Ah, my dedicated reader, you already know where we are going here. The old expression that “there is no free lunch” applies here. For every investment class there are advantages and downsides.
There is liquidity risk. That is to say, the plan might not have the money it needs and can be stuck with an investment that cannot be sold quickly. However, with proper planning this should not be a problem. As with private equity, a wise investor would not invest money in an illiquid asset if it will be needed quickly.
Also consider, some infrastructure investments are overseas. Foreign infrastructure investments have currency risk and may have geopolitical risks. There are, of course, many other risks and considerations that must be considered such as environmental risk and operating risks.