AGEAS/NV : Global players serie in Tijd and Echo : Ageas & Ghelamco

Infrastructure investments offer higher returns than traditional bonds, but do come with a downside: they are much less tradable. And that's just what the doctor ordered for a long-term investor like Ageas.

Times have been tough for those investing in qualitative fixed income debts in recent years. That is why institutional investors like insurance companies are looking for other ways to achieve sufficient returns on their investment portfolios with a typical long-term horizon. Shares look like a logical choice, but due to the new capital rules for insurance companies (Solvency II), they are mired in high capital costs. In practice, this means that they need to keep 40 euros of capital for every 100 euros they invest in shares.

'Let's just say that these regulations are not very constructive when it comes to shares,' says Wim Vermeir, Chief Investment Officer at Ageas. 'Once the new IFRS 9 accounting regulations are implemented, we'll even have to include every market swing into our profit and loss account straight away. At the moment our portfolio holds around 4% shares, which equates to about 3 billion euros. Given the strong market fluctuations of the past months, that could easily entail a profit or loss to our results of 300 million on a quarterly basis. We do not like these heavy fluctuations in our returns.'

Government bonds are much more attractive than shares in terms of regulations, as they do not include mandatory capital costs, but at the moment they only offer a low interest rate. 'Moreover, we take the underlying risk into account for ourselves,' Vermeir explains. 'Just because Solvency II says government bonds carry no risk, doesn't mean we agree. You really do need to be sure about the health of an Italian 30-year bond, if you're using it to cover a pension liability for the same period.'

Lucrative investments

Most of Ageas' investment portfolio consists of highly liquid fixed income debt. This excellent tradability comes at a price: returns are not particularly high. That is why the insurance company spices up the portfolio with more lucrative investments.

Part of these are in the infrastructure niche. One of the most noteworthy projects is the school construction programme Scholen van Morgen (Schools of Tomorrow), which includes 165 plans to construct or renovate 200 buildings by 2017. It is a public-private collaboration with the Flemish government. The latter pays Ageas a fee for construction, maintenance and financing for thirty years, after which it becomes the owner of the school buildings.

This type of project fits neatly within Ageas' search for stable, defensive investments with regular cash flows, a very long horizon and an illiquidity premium, Vermeir explains.

But most infrastructure investments take the form of loans, whereby Ageas offers credit for the construction of a prison or a motorway, for example. These relatively complex products have several advantages, says the investment strategist. 'With these investments you can achieve returns of 1 to 2 percentage points above those of traditional bonds. Vermeir emphasises that this does not involve more risk. 'The excess returns compensate for the fact that these securities are not easily tradable. But as a long-term investor, we don't really need this liquidity. Fixed income paper should above all be safe, so we can keep it until it matures.'

Of course Ageas is not a typical investor. Private investors are often unable to invest in infrastructure projects. 'There is a sweet spot for bond emissions to finance infrastructure, for an amount between 50 and 200 million euros,' Vermeir indicates. 'The issuer will usually only target institutional players, like via a private placement, because it is too expensive to seek financing from the general public.'

Refinancing risk

Another way Ageas invests in real estate is through mortgage lending. Given the sub-prime mortgage lending crisis of 2008, repackaged mortgage debt doesn't have the best name. 'If we buy such debt, it is entered into the balance sheet directly, so we don't use any complex structures,' Vermeir says. 'That way you always know what you've got. The advantage of mortgage debt? It yields almost a full percentage point more return than corporate bonds, while the credit risk is broadly the same.'

However, the CIO notes it does come with a significant disadvantage. 'If mortgage borrowers refinance their loans because the interest rate has decreased, as happened in Belgium en masse in the past year and a half, this dampens the return of these securities. This refinancing risk is not in line with our aim to achieve the most stable returns possible. As such, mortgage debt does fit into our portfolio, but it can only make up a limited part. At the moment it makes up 1.5 billion euros in our portfolio.'

And finally, Ageas also invests a good 1.7 billion euros in social housing project credits. These are loans issued by institutions that build social housing or finance social lending. 'These exist in various European countries, where the government will traditionally act as a guarantor,' Vermeir explains. 'The return on these loans is typically 40 to 100 bps higher than the return on government bonds from those same countries. And that is certainly not because they carry a higher risk - the guarantee makes them just as safe as government bonds - it's merely because they are less tradable.'

Cooperating with banks: a win-win relationship

For its infrastructure lending investments, Ageas increasingly cooperates with French investment bank Natixis. 'Banks have the network and the know-how we lack to structure a deal,' says Wim Vermeir, CIO at Ageas. 'As a result of the Basel III guidelines, banks are now obliged to bring their loans in line with the financing they receive from their clients. Given that the latter often concerns short-term deposits, they are not allowed to hold too much long-term credit. And that's when we come in with our long-term horizon.'

Natixis selects infrastructure projects while keeping in mind the risk Ageas wants to take on for a certain duration. 'By co-financing these, we both win. Natixis receives a fee for structuring a deal while not having to enter it into their balance sheet in full; and we're happy to benefit from their experience.'

It is important to Ageas that Natixis takes on part of the risk, Vermeir adds. 'That adds credibility to their recommendation of a project. Because if it turns out they were wrong, they also stand to lose something.'

Ageas investment portfolio allocation as at end of September 2015

Bonds 77 percent

• Loans 9 percent
• Real Estate 6 percent
• Shares 5 percent
• Cash 3 percent