May 2015
Why Infrastructure has a place in a retirement portfolio
Eric Smith, CIO, Redpoint Investment Management
Australia at the forefront of financial innovation is not something you hear much about but in the financial capitals of the world you’ll often find Australian’s over represented on that score.
Considering the size of our population, the sophistication of financial products developed in Australia leaves many other countries in our wake. For instance, Australian bank consumers are well in front compared with many countries thanks to Australia’s early adoption of technology.
It is the same when it comes to how Australia finances its infrastructure expenditure. Some $100 billion is spent each year on infrastructure in this country: from bridges, railroads and road to communications and electricity networks.
For some 20 years, since the advent of specialist funds targeting this area for investors, Australian policy markets and business leaders have developed a greater understanding and acceptance of the direct role private investment can play in developing infrastructure – on a stand alone basis or in partnership with government.
Traditionally, investing in infrastructure was seen as the domain of large corporate investors like super funds as opposed to individual investors. Though this remains the case for unlisted infrastructure, the emergence of listed infrastructure as a market for individual investors is still developing. As a result, the benefits listed infrastructure can deliver have not been fully incorporated into the thinking of many individual investors. There is, however, a place for listed infrastructure in a retirement portfolio.
Infrastructure is considered to be a facility or service that is essential for an economy or society to function efficiently. Global listed infrastructure provides a large and growing investment opportunity as demand for new and replacement infrastructure increases and governments rely more heavily on the private sector to finance, build and operate them.
Infrastructure return characteristics are different to mainstream growth asset classes like shares and property in that the risks that they are exposed to, the factors that influence their revenues and the regulated nature of the assets tend to deliver more stable income returns over the business cycle.
The potential income generation of ‘user-pays’ infrastructure assets like toll roads, public transportation services and telecommunications projects exists from the inherent demand for, reliance on, and use of the assets. In addition, the usage charges for services of many infrastructure assets are linked to the inflation rate.
This means the real value of these revenue streams are less affected if the economy slows and inflation rises.
The duration of infrastructure projects is often supported by long-term contracts or government regulation. This, in conjunction with stable demand, relative insensitivity to economic conditions and greater inflation protection, delivers a pattern of returns that is somewhat independent of other listed asset classes that aren’t driven by the same underlying characteristics.
Consequently, while listed infrastructure securities do fluctuate in value from day to day, they can be a diversifying allocation in a multi-asset class portfolio. In my role at Redpoint Investment Management, we are focused on identifying opportunities that allow us to capture, through our investment philosophy and investment processes, the essence of the global infrastructure asset class. Holding a well-diversified portfolio of companies that we consider to be of good quality in core infrastructure sectors assists in our ability to meet our investment objectives, capture returns more effectively and access a stable, underlying income stream.
During the GFC, many diversified Australian and global equity portfolios fell 50% or more in value. Compounding this fall in value, many companies, including global giants such as Toyota and the local banks, cut dividends in 2009 and 2010 in response to the market turmoil of 2008.
In contrast, typical, well-diversified listed infrastructure portfolios fell ‘only’ 35%. However, for the buy and hold investor, the dollar-dividends from these portfolios were only marginally affected. Many infrastructure companies – such as Union Pacific Corp (a US rail company), Flughafen Zuerich AG (the operator of Zurich Airport) and APA Group (an Australian gas pipeline owner) – delivered steadily rising dividends through the period.
Retirement investments are generally designed to generate steady income. Global Listed Infrastructure provides an asset class with the ability to integrate this requirement with a number of additional benefits. These include additional diversification potential, reduced inflationary impacts and potential long-term income growth. The characteristics of this asset class – less value volatility than equities in general and greater stability and consistency in dividend growth – lead us to believe that listed infrastructure has an important role to play in building a retirement portfolio.
Australia at the forefront of financial innovation is not something you hear much about but in the financial capitals of the world you’ll often find Australian’s over represented on that score.
Considering the size of our population, the sophistication of financial products developed in Australia leaves many other countries in our wake. For instance, Australian bank consumers are well in front compared with many countries thanks to Australia’s early adoption of technology.
It is the same when it comes to how Australia finances its infrastructure expenditure. Some $100 billion is spent each year on infrastructure in this country: from bridges, railroads and road to communications and electricity networks.
For some 20 years, since the advent of specialist funds targeting this area for investors, Australian policy markets and business leaders have developed a greater understanding and acceptance of the direct role private investment can play in developing infrastructure – on a stand alone basis or in partnership with government.
Traditionally, investing in infrastructure was seen as the domain of large corporate investors like super funds as opposed to individual investors. Though this remains the case for unlisted infrastructure, the emergence of listed infrastructure as a market for individual investors is still developing. As a result, the benefits listed infrastructure can deliver have not been fully incorporated into the thinking of many individual investors. There is, however, a place for listed infrastructure in a retirement portfolio.
Infrastructure is considered to be a facility or service that is essential for an economy or society to function efficiently. Global listed infrastructure provides a large and growing investment opportunity as demand for new and replacement infrastructure increases and governments rely more heavily on the private sector to finance, build and operate them.
Infrastructure return characteristics are different to mainstream growth asset classes like shares and property in that the risks that they are exposed to, the factors that influence their revenues and the regulated nature of the assets tend to deliver more stable income returns over the business cycle.
The potential income generation of ‘user-pays’ infrastructure assets like toll roads, public transportation services and telecommunications projects exists from the inherent demand for, reliance on, and use of the assets. In addition, the usage charges for services of many infrastructure assets are linked to the inflation rate.
This means the real value of these revenue streams are less affected if the economy slows and inflation rises.
The duration of infrastructure projects is often supported by long-term contracts or government regulation. This, in conjunction with stable demand, relative insensitivity to economic conditions and greater inflation protection, delivers a pattern of returns that is somewhat independent of other listed asset classes that aren’t driven by the same underlying characteristics.
Consequently, while listed infrastructure securities do fluctuate in value from day to day, they can be a diversifying allocation in a multi-asset class portfolio. In my role at Redpoint Investment Management, we are focused on identifying opportunities that allow us to capture, through our investment philosophy and investment processes, the essence of the global infrastructure asset class. Holding a well-diversified portfolio of companies that we consider to be of good quality in core infrastructure sectors assists in our ability to meet our investment objectives, capture returns more effectively and access a stable, underlying income stream.
During the GFC, many diversified Australian and global equity portfolios fell 50% or more in value. Compounding this fall in value, many companies, including global giants such as Toyota and the local banks, cut dividends in 2009 and 2010 in response to the market turmoil of 2008.
In contrast, typical, well-diversified listed infrastructure portfolios fell ‘only’ 35%. However, for the buy and hold investor, the dollar-dividends from these portfolios were only marginally affected. Many infrastructure companies – such as Union Pacific Corp (a US rail company), Flughafen Zuerich AG (the operator of Zurich Airport) and APA Group (an Australian gas pipeline owner) – delivered steadily rising dividends through the period.
Retirement investments are generally designed to generate steady income. Global Listed Infrastructure provides an asset class with the ability to integrate this requirement with a number of additional benefits. These include additional diversification potential, reduced inflationary impacts and potential long-term income growth. The characteristics of this asset class – less value volatility than equities in general and greater stability and consistency in dividend growth – lead us to believe that listed infrastructure has an important role to play in building a retirement portfolio.
Important information : This communication is provided by Redpoint Investment Management Pty Limited (ABN 83 152 313 758, AFSL 411671) (Redpoint). The information in the communication is of a general nature only and is not financial product advice. The communication is not intended to offer products or services provided by Redpoint or its affiliates. Opinions constitute our judgement at the time of issue and are subject to change. Neither Redpoint nor its employees or directors give any warranty of accuracy or reliability, nor accept any responsibility for errors or omissions in this communication.