3 factors that underpin infrastructure returns
Infrastructure returns tend to follow predictable and more stable paths
Volatile and uncertain markets are highlighting the benefits infrastructure investment can bring to an SMSF investor’s portfolio. In this article, we discuss that the reason infrastructure returns tend to follow predictable and more stable paths comes down to factors such as the basic characteristics of infrastructure assets, the markets they operate in, and the nature of the revenues that they generate.
Infrastructure assets are ‘essential services assets’ that help drive productivity and economic growth, facilitate the provision of essential community services, and underpin the day-to-day operation of society. We are talking about assets like airports, roads, ports, electricity and gas transmission and distribution, as well as hospitals and schools.
As infrastructure assets are essential to the operation of society, they are often less influenced by economic factors than many other businesses, meaning they can deliver steady returns through economic cycles.
Infrastructure assets tend to possess monopolistic characteristics, or operate in markets where there are high barriers to entry. This means they are often free from the competitive pressures faced by many more traditional companies.
Predictable long-term revenues
Infrastructure assets typically generate secure and predictable revenues, which are often underpinned by regulation or long term contracts. This means they can provide sustainable revenues through economic cycles, providing investors with a high level of visibility over future cash flows. In addition, these revenues are often linked to inflation, which can help to protect investors against the erosion of the value of their investment by inflation.
Investor interest in infrastructure continues to grow, given its potential to deliver stable and attractive risk-adjusted returns, with lower levels of volatility than many other asset classes. The defensive characteristics of infrastructure, including the essential services nature of the assets, their monopolistic characteristics, and their ability to generate sustainable long-term revenues, means it may be something worth thinking about in times of market turmoil.
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About the author
John Julian, Portfolio Manager - Core Infrastructure Fund, AMP Capital