Infrastructure offers a range of investment characteristics that can be particularly attractive in the low interest rate and volatile market conditions we have seen in recent times. Clients tell us they like its attractive, consistent returns and yield; defensive characteristics; and diversification benefits. Infrastructure is also becoming more accessible to retail investors. In the past, high quality unlisted infrastructure assets were usually only available to large institutional investors but now mums and dads can own their own piece of Melbourne Airport or UK rolling stock company Angel Trains.
Below are five reasons why investors should consider infrastructure.
Attractive, consistent returns
Infrastructure offers the potential for attractive, consistent returns through market cycles. This is because infrastructure assets are often essential to the day-to-day operation of our society such as the provision of water or electricity and gas. Due to the nature of the essential services they provide, these types of assets are often less influenced by economic factors than many other businesses. In addition, infrastructure assets often enjoy the protection of monopolies, or operate in markets where the barriers to entry are high, meaning they are often free from the competitive pressures faced by many more traditional companies.
It can help investors meet their income goals
Infrastructure assets can provide consistent, long-term income yields because their revenues are often underpinned by regulation or by long-term contracts with highly creditworthy counterparties (which can often include governments). Consequently, infrastructure assets may offer a high level of security with regards their future revenues. Infrastructure asset revenues are also often linked to inflation, which can help investors protect against erosion of the value of their investment by inflation over time.
It’s a defensive play
Infrastructure generally, and unlisted infrastructure particularly, can play an important role for long-term investors due to the stability it can provide within a diversified investment portfolio and the visibility of the income streams it generates. In a low interest rate environment where the outlook for total return appears compressed, asset classes that exhibit defensive characteristics with an attractive and stable income profile are obvious candidates for a long-term investment strategy.
The world needs more and updated infrastructure
Infrastructure is an investment thematic that will continue to play out because the need for infrastructure is a never-ending cycle. Growing populations need to be supported by additional infrastructure while ageing infrastructure needs to be periodically upgraded or replaced. Investment in infrastructure helps stimulate sustainable, long-term economic growth, which then creates a further need for infrastructure. Ultimately, infrastructure promotes higher living standards as it fosters economic growth and creates jobs. A McKinsey report estimates that US$57 trillion of global investment in infrastructure will be required by 2030.
Active management of infrastructure assets
AMP Capital has an active asset management philosophy when it comes to the management of the unlisted infrastructure assets it invests in. AMP Capital employs asset managers who have had extensive senior level industry experience. In addition, AMP Capital seeks to ensure that the overall stake under its control is sufficient to allow for significant influence over the future direction of the business. This would typically involve representation on the boards of the businesses. AMP Capital has a high level of involvement in these businesses, with a view to driving returns and managing risk for the benefit of investors.
By John Julian
Portfolio Manager, Core Infrastructure Fund, AMP Capital
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.