Fund managers’ current data reporting practices for infrastructure assets do not provide Japan’s Government Pension Investment Fund and other asset owners with adequate information to measure fair value and manage risks in their portfolios, a report commissioned by the pension fund found.

Tokyo-based GPIF had ¥252.86 trillion ($1.61 trillion) in assets as of Sept. 30.

Money managers that follow ethical guidance under the Global Investment Performance Standards are expected to provide “a full and fair disclosure of their performance,” but research has shown that infrastructure assets invested through a fund can sometimes maintain the same net asset value on paper for as many as five consecutive years, the report found.

In addition, managers face pressure in a higher interest environment and are at times reluctant to update valuations to reduce the impact on liquidity risk management, according to the report by Scientific Infra & Private Assets, the commercial arm of the EDHEC Infrastructure & Private Assets Research Institute.

“Everyone in the industry knows that the reported NAVs are wrong. If you ask a room full of investors, this is common knowledge. But this is increasingly unacceptable given the amounts at stake,” Frederic Blanc-Brude, director at the EDHEC Infrastructure & Private Assets Research Institute based in Singapore, said in an email.

Some asset managers tend to prefer to keep information to themselves and only share the bare minimum with limited partners even if they have resources to gather the data, he added.

The firm analyzed data for 20 infrastructure assets and found that the data provided by infrastructure asset managers to GPIF was partial and limited. For instance, data about the investment assets were provided but not about the operating company.

“We reviewed hundreds of documents about individual investments, and many were actually held at cost in unconsolidated subsidiaries,” Blanc-Brude said.

“This means that the LP has zero information on the current market value of these investments. The difficulty faced by an influential investor like GPIF in obtaining decent data from its fund managers was striking and quite worrying, albeit not that surprising,” he said.

Several asset managers did not provide the infrastructure asset operating company’s financial statements, or information to determine revenue drivers and analyze the capital structure or dividend payments, the report found.

Monitoring risk is essential because it is the best, if not the only, forward-looking metric for investors to predict performance, the report wrote.

GPIF commissioned report

GPIF commissioned the report, a GPIF spokeswoman said in emailed comments, mainly for this reason: “Infrastructure assets have a relatively short market history among alternative assets, and knowledge on fair value estimation techniques and understanding of risk/return characteristics is limited.”

“However, in order to further enhance the management of the entire portfolio of GPIF, we believe that more advanced performance and risk analysis is required for unlisted infrastructure assets as well. This research examines the collection of data on unlisted infrastructure assets and quantitative analysis of risk/return characteristics. We recognize EDHEC as one of the leading institutions for this research area,” she said.

GPIF has steadily increased investments in alternative assets including infrastructure, real estate and private equity.

The pension fund had ¥1.85 trillion invested in infrastructure, ¥1.17 trillion in real estate and ¥680 billion in private equity in the last financial year ended March 31. This indicated a rise across all three asset classes from ¥1.45 trillion, ¥919.4 billion and ¥306.6 billion, respectively, from the previous financial year.

The fund had 1.47% of its portfolio invested in alternative assets as of March 31, well below its cap of 5%. The spokeswoman declined to comment on whether GPIF plans to increase allocations to infrastructure assets.

The fund has in recent years been trying to take a more quantitative approach to valuing and analyzing its investments. “GPIF believes that detailed quantitative analysis will become more important in order to increase the certainty of obtaining excess returns on alternative assets over the listed market,” the spokeswoman said.

GPIF has started to look into the establishment of a new database of alternative assets in order to obtain and analyze detailed quantitative data such as investment performance data of each fund efficiently, she added. “We are planning to utilize the findings of the research for collecting these quantitative data,” she said.

Alternative approach

The report shows that a modern approach to price assets and calibrate discount rates using updated market information will allow investors to measure fair value on an ongoing basis “quite well at the portfolio level and understand the risks and the return drivers of these investments,” Blanc-Brude said.

“For an investor like GPIF this is useful because the information they receive from fund managers does not allow them to do that,” he added. He anticipates that more asset owners will take an interest in how their infrastructure assets are being valued particularly as limited partners “have seen fewer distributions coming from private asset funds, (and) they have questions about the liquidation value of the assets.”

“More generally, as private assets have become a larger part of institutional portfolios, the question of their current fair market value is becoming more significant for obvious prudential and fiduciary reasons,” he said.

As a result, fund managers are “increasingly required to provide more updated and transparent information about the assets in each fund, to explain how they are valued and why the values change or not. This also requires the audit sector to evolve from cookie-cutter, boilerplate approaches to fair value reporting to using better data and better models,” he said

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