A collection of Futuregrowth thought leadership pieces, media articles and interviews.

Paving the way for infrastructure investments in a low return environment

12 Jun 2018



Futuregrowth’s Infrastructure & Development Bond Fund, with assets of over R14 billion, has played an integral part in infrastructure and developmental funding since its launch before the turn of the millennium and the advent of a democratic South Africa.

By providing access to a sustainable vehicle to fund initiatives in the infrastructure and development space, pension funds invested in the fund are able to gain exposure to sectors such as power, healthcare, transport, education, SMME development and housing to name a few. Over an 18 year period, the fund has on average outperformed the JSE All Bond Index (the industry standard benchmark for bond funds) by 2%. This is a phenomenal achievement, where the Fund had weathered the 2007/2008 credit crisis as well as the spate of credit defaults experienced on the JSE over the last 5 years.

This goes a far way to prove the point that the retirement fund industry can play a very important role as capital providers to national development. Changes to Regulation 28 of the Pension Funds Act have now afforded investors an opportunity for higher allocations to these types of investments, which will typically form part of a fund’s allocation to either bonds/debt or private equity. A large portion of these investments is typically of an unlisted nature and usually does not carry an official rating (in respect of debt instruments) which is in any case no longer a requirement under Regulation 28. It is therefore of paramount importance that retirement fund trustees are comfortable with the skills of their underlying managers to both assess and manage the multitude of risks involved in both investing in and pricing unlisted investments. 

Some retirement funds with fixed income mandates only allow investments in a listed form, therefore the JSE together with ASISA have been working together to create an allowance for so-called “Project Bonds” which will allow various projects that require funding to tap into a new pool of capital via the listed debt portal of the JSE. Despite their “listed” nature, these project bonds still carry the same level of risks as a typical “unlisted” project finance transaction.

It is important to note that investments in infrastructure assets should not be seen as a different asset class as they need to fit within an already defined asset allocation strategy. Infrastructure assets are typically long term in nature and act as a natural asset/liability match for retirement funds. The returns afforded to retirement funds need to be on full commercial terms, thereby giving investors sound risk/return characteristics. There is a role for subsidised financing to make some transactions bankable, but this can only be done through government agencies like the Development Finance Institutions such as the Development Bank of Southern Africa, Land Bank etc.

South Africa as an emerging economy continues to have a massive infrastructure backlog that needs to be funded, as well as continued investment roll-out which hasn’t been assisted by various delays by the Department of Energy/Eskom in terms signing various round 4 transactions as part of the successful Renewable Energy Independent Power Producer Procurement programme.

The South African government has targeted a required infrastructure spend of around R4 trillion over the next few decades to address some of this backlog. Although government is expected to contribute some of the envisaged funding, the private sector (banks and institutional investors) could play a role as well. Bankability of projects remains the foremost requirement to ensure that the private sector remains involved.

In a low-return environment, these investments can offer a good alternative to traditional investments in a diversified portfolio, but it is critically important to choose an experienced investment manager who has the skills to both assess and correctly price for these risks. 

Click to read more about the Infrastructure & Development Bond Fund.