Investment insights: What is infrastructure and what are the opportunities?

Infrastructure has been a buzz word in investment markets for much of 2014, as investors in Australia (especially SMSF trustees) are searching for income in their portfolio’s as term deposit and cash rates continue to remain at historically low rates. The government has also flagged their focus on this issue as the size of the superannuation pool grows. I will highlight below that serious consideration should be given to this asset class, as by nature they align well with a long-term investment portfolio aiming to achieve consistent levels of income.

So what is infrastructure? Broadly infrastructure relates to the provision of essential services for a functioning economy.  These services regularly exhibit the following characteristics:

  • Have demand, which is inelastic to price changes.
  • The businesses which operate in these areas can have monopolistic or quasi-monopolistic characteristics due to geographical or regulation.
  • Long duration assets (often 30 years plus)
  • Inflation linked pricing agreements and contracts.
  • Based on these factors, these investments can therefore provide predictable and sustainable cash flows.

Common sectors of infrastructure are:

  • Transport: Roads, rail, airports, and ports
  • Utilities: Electricity, water, telecommunications, sewerage and gas
  • Social: Hospitals, prisons, schools and other community based essential services.

 

What are the potential benefits of having infrastructure exposure in your portfolio?

Infrastructure can add another layer of diversification within an investment portfolio. They generally deliver their revenues in a more consistent and predictable manner than other businesses, due to the nature of their assets and subsequent revenues. This could be a welcome addition to many peoples investment portfolio, especially those seeking more consistent income flows as opposed to capital growth.

The key benefits are:

  • inflation-linked returns
  • demand which is inelastic to price changes
  • low correlation and volatility compared with traditional asset classes
  • stable long-term yields, with the potential for capital growth
  • defensive characteristics by provision of essential services

 

No investment is 100% bulletproof or without risk. Like other investments you are investing in a business and as such the underlying value can be impacted from the economy, management, demand for services, and broader investment market sentiment. Which means that things can still go wrong with these businesses! So always do your research and/or get the right advice. Some of the key risks specific to infrastructure which you should also note are:

  • Regulatory risk: Changes to regulation can have significant impacts to operations and revenues.
  • Political risk: As with regulatory changes, a change in government can have an impact to the operations and revenue.
  • Interest rate risk: Businesses in this space can have significant lending to fund running the assets. Therefore a rise in interest rates can impact the costs and profits.
  • Merger and Acquisition risk: Infrastructure assets can sometimes be attractive takeover targets. They could then be acquired by a business, which changes the nature of your initial intended investment.

This article from Lazard Asset management’s Warren Robertson gives some further detail and insights into how Lazard assess investment opportunities in what they refer to as ‘preferred infrastructure’. The article was published in Investor Daily and is available at the following link: http://www.investordaily.com.au/investor-weekly/opinion/35901-hunting-for-preferred-infrastructure

As always the information above is general in nature, and if you would like any advice in relation to your personal circumstances then please contact us.

 

Pete Pennicott - Pekada

Post contributor:
Pete Pennicott
Financial Planner @ Pekada

Disclaimer: The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Charter Financial Planning. You may not alter or modify this information in any way, including the removal of this copyright notice.

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

The information provided on this website is general in nature and does not constitute advice. You need to consider with your financial situation and your particular needs prior to making any strategy or products decision. Pekada will endeavour to update the website as needed. However, information can change without notice and Pekada does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time Unless otherwise specified, copyright or information provided on this website is owned by Communitas. You may not alter or modify this information in any way, including the removal of this copyright notice.