CIO Robert ‘Vince’ Smith talks about the performance of the $21.5bn endowment’s real return portfolio as it shifts focus toward infrastructure and energy.
New Mexico State Investment Council’s agri-heavy real return portfolio is generating strong returns in today’s market environment and favours the permanent endowment’s strategy to make cash-generating investments.
The $1.06 billion real return portfolio – comprising timber, agriculture, energy and infrastructure and others – returned a net 12.5 percent for the $21.5 billion endowment in 2016, according to NMSIC’s annual investment plan. This beats real estate’s 8.2 percent return during the same period and private equity’s 11 percent gains over 12 months ending in March. The portfolio increased by $466.7 million year-to-year.
Despite the solid performance, the institution is in the midst of a strategy shift that will see it redouble efforts to target infrastructure and energy after hitting allocation targets for timberland and agri in a short period of time.
“Those two areas, infrastructure and energy, are much larger than farmland and timber. We got full on timber and farmland fairly quickly,” Robert ‘Vince’ Smith, NMSIC’s chief investment officer, told sister publication Infrastructure Investor.
“With the agriculture and timber portfolios fully built-out, the focus for the near term will be to make commitments in the energy and infrastructure sectors,” concurred NMSIC in recent meeting materials.
The endowment’s past investments in the former two include a $100 million pledge to Brookfield Timberlands Fund V, $200 million to TIAA-CREF Global Agriculture Fund II, $125 million to Resource Management Service’s Evergreen US Forestland Fund, $75 million to Brookfield AgriLand Fund II and, most recently, a $50 million commitment to Agriculture Capital Management Fund II.
Agriculture and timberland represent 19.2 percent each of NMSIC’s real return portfolio, with energy and infrastructure respectively accounting for 30.7 percent and 26.3 percent. “Across the portfolio, we’re favouring investments that produce income as a larger portion of their total rate of return,” Smith said.
‘NO TIME TO CHASE RETURNS’
He indicated the endowment is forecasting its 2018 real return allocation will drop from $300 million to around $175 million a year until the real return portfolio is fully invested.
The real return portfolio has a 12 percent target allocation from each of NMSIC’s two permanent funds, and those two funds are 95 percent of NMSIC’s total portfolio. Seventy-five percent of the allocation is for hard assets and the rest for financial assets.
NMSIC began investing in real return assets in 2011 to diversify its portfolio from high equity and risk exposure, Smith said. Now, in a slow-growth economy, with modest interest rates and stable inflation, the steady cashflow that is a hallmark of infrastructure investments is looking attractive.
“Generally, the belief is that now is not a time to chase returns, but instead is a time to protect capital,” NMSIC said. But Smith explained NMSIC’s real return strategy is not easily influenced by external market conditions.
“I don’t think we’re constructing it in any particular way because of that environment,” he said. “If we had a higher-growth environment, I guess the question then would be: ‘Would we construct it differently?’– and I don’t know that we would.”
Additional reporting by Matthieu Favas