According to the Wall Street Journal, pension funds will make $3.37 trillion in infrastructure investments in the next 10 years. Infrastructure investments will rise from 2% of pension fund assets to 15%.This seems like a disaster in the making. The funds may be unable to avoid it. But you can. Why is it a disaster?
Individual funds often have hundreds of millions or even billions of dollars to invest. But you can’t just throw around money like that without moving markets (or stocks). Your investment choices are limited by assets that have enough liquidity to accommodate the amount of cash you have to put to work.
In a bull market in bonds and stocks, this is not a problem. If you’re a large fund manager, you buy stocks and government bonds. Everything goes up. Everything is fine.
In a bear market in stocks and government bonds…it doesn’t work. As the fund approaches the day when redemptions start to roll in, you have a problem. You have all this cash and nowhere to put it where you can get a return that beats inflation. Enter infrastructure investments.
Infrastructure investments are typically such long-lived, capital-intensive assets that private investors tend to avoid them. Only the government can afford to lose money consistently over time. The government defends this by suggesting that the returns on large infrastructure projects are alleged to be more than just financial. You get a growing capital stock for an economy. Or you get alleged productivity boosts from things like better highway networks and bridges and power plants.
This, too, is an interesting debate about whether there are some projects so big only the government can finance them (since the returns are too low to attract private investors, or the projects are too high-risk and low-profit to attract bank financing). But today we’re only interested in the feature of infrastructure projects that makes them attractive to pension funds: their size.
Multi-billion-dollar projects are large enough to accommodate large fund flows. And fund managers have a tried-and-true playbook to execute from when it comes to selling the benefits of infrastructure investments to customers. “It’s good for the economy….It’s government backed….The rate of return is guaranteed to match inflation.”
But what you should worry about is that a lot of your money is about to get invested in lousy investments…because, no matter how lousy those investments are, they are liquid…which makes them less lousy than stocks and government bonds.
If you want to think about it another way, the pool of assets that it’s possible for large fund managers to safely hide capital in (and beat inflation) is getting smaller and more concentrated. If your money is in this pool, it will get herded around not because the move improves your returns, but because there aren’t many liquid refuges left.
This is actually good news for individual stock buyers, though. If large pools of capital move out of stocks and into other asset classes, it means the cultural attitude toward the share market is negative. People are giving up on the idea of getting rich through shares. They’ll stick with houses. Or allow their bank’s wealth management division to put their deposits to work in government bonds or infrastructure. It may not be exciting. But at least they won’t lose money as quickly as they might in shares, right?
We’ll see about the long-term “safety” of infrastructure investments. But in the meantime, you’re not obligated to behave like a fund manager. Your investment decisions are not limited by the assets that can accommodate your liquidity flows. If anything, an investor will be spoiled for choice when everyone else gives up on stocks.
If you’ve kept your money from being destroyed by the bear, you will have a big advantage over other investors: you’ll have money to buy stocks when no one wants them. That’s the best time to buy.
for The Daily Reckoning Australia
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