Infrastructure emerges as a compelling asset class for SMSFs
Infrastructure has emerged as a compelling asset class for SMSFs seeking returns uncorrelated with equities and opportunities to access growth assets and consistent income streams in a world of low returns and lower interest rates.
Infrastructure assets provide or facilitate essential services that support economic growth, generate productivity and underpin the operation of society. They can be categorised in four broad areas: social assets such as hospitals and schools, regulated utilities such as water companies, transport assets such as roads and airports and telecommunication assets such as mobile phone towers.
Infrastructure assets generally have a differentiated set of characteristics compared to many other asset classes. For instance many infrastructure assets have a dominant market position, or operate in markets with significant barriers to entry. Infrastructure assets usually have a long duration and often have a life of 30 years or more.
While infrastructure assets may have some common characteristics, every infrastructure asset is unique and may be subject to its own specific characteristics and risks, which is something all investors must keep in mind.
Individual asset characteristics matter
The characteristics and risks of individual infrastructure assets will vary, depending on a range of factors, including the stage the asset is at in its lifecycle. Mature, fully operational assets are typically lower risk, and returns are predominantly from income rather than capital gains. In contrast, development assets, which include existing assets undergoing enhancements, typically carry a medium level of risk and often generate capital and income returns. Greenfield assets, which are new projects for construction, carry higher risks, but potentially also generate higher capital returns, often with little or no income, compared to mature and development assets. It’s worth noting stability of cash flow is directly correlated with asset maturity: the more mature the asset, the higher the stability of cash flows it generates.
What can infrastructure offer SMSF investors?
The main benefits of this asset class include the potential to deliver steady returns through market cycles with lower volatility compared to many other asset classes.
Other investment attributes include stable long-term income yields, with revenues often being linked to inflation. Including infrastructure in a portfolio can also offer diversification benefits and a reduction in overall portfolio risk.
It’s worth noting that infrastructure is an asset class that is increasingly attractive to institutional investors. Many are re-apportioning capital that would previously have been allocated to other asset classes such as stocks and bonds. For instance, AMP Capital research indicates 48% of institutional investors expect to allocate more capital to infrastructure in 2016 than 2015. Moreover, 52%want to increase their allocation in 2016 compared to 2015.
Nevertheless, it’s important to be aware of potential risks in the infrastructure sector. Every infrastructure asset is different and will have its own specific risks. As such risk identification, mitigation and management is crucial for any infrastructure asset.
Some common risks that apply to many infrastructure assets include interest rate sensitivity and refinancing risk, lack of liquidity, regulatory, political and operating risk.
This year there are a number of variables that are likely to impact financial markets. These include uneven global growth prospects, question marks over the timing and extent of US rate hikes, and ongoing uncertainty around a range of geopolitical risks. As a result, global markets are likely to experience continued volatility. Against this uncertain backdrop, the infrastructure asset class offers some compelling characteristics, and may well be worthy of consideration for inclusion in a SMSF portfolio.
About the author
John Julian is an Investment Director in AMP Capital's Global Infrastructure team, and the portfolio Manager of the AMP Capital Core Infrastructure Fund. He has over 23 years financial sector and investment experience in both commercial and legal roles.