Infrastructure characteristics and driving returns
The infrastructure asset class has been growing in popularity as an investment destination for both institutional and SMSF investors.
This is because 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.
Attractive, consistent returns
For example, infrastructure offers the potential for attractive, consistent returns through market cycles. This is because infrastructure assets are essential to the day-to-day operation of our society – think of assets providing water for drinking and washing; or assets providing electricity and gas for heating, lighting and cooking. 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. This feature can help infrastructure to deliver steady returns through market cycles.
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.
Consistent long-term income yields
Infrastructure assets can provide consistent long-term income yields. This is 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 often offer a high level of visibility and security with regards to 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.
While these intrinsic characteristics of infrastructure assets may make them a natural fit for many SMSF investors, like all operating companies, proactive management of the asset can ensure that returns are optimised.
Activie management of infrastructure assets
AMP Capital has an active asset management philosophy when it comes to the management of the unlisted infrastructure assets that we invest in. We employ asset managers who have had extensive senior level experience in the industries we invest in. In addition, when we invest in unlisted infrastructure assets, we seek to ensure that the overall stake under AMP Capital control is sufficient to ensure we have significant influence over the future direction of the business. This would typically involve representation on the boards of the businesses that we invest in.
Case study: Melbourne Airport
For example, AMP Capital has managed the largest single stake in Melbourne Airport, since its privatisation in 1997.
Our broader capabilities in industrial property development, retail mall and car parking operations have been utilised by the airport management to assist in enhancing and growing these operations which, on a combined basis, now generate more revenues than the traditional aeronautical component of the business.
Additionally, AMP Capital’s financial expertise has been utilised by airport management to assist in the airport’s capital management programme and debt portfolio.
Finally, decisions on the amount and timing of the capital investment necessary for growth (for example enhancing and extending terminal buildings and constructing new runways) have the potential to materially impact long term returns. Too early a commitment could result in underutilised assets, while too late could result in foregone revenues. Getting the timing of these capital investments right is a major focus of the Board and requires deep industry knowledge and experience.
During the period of AMP Capital stewardship, the value of Melbourne Airport has grown at a compound rate of in excess of 20% per annum.
About the author
John Julian is an Investment Director in AMP Capital's Global Infrastructure team, and the Fund Manager of the AMP Capital Core Infrastructure Fund. He has over 23 years financial sector and investment experience in both commercial and legal roles.
Greg Maclean is responsible for developing and managing AMP Capital’s infrastructure research capabilities, and conducts both macroeconomic and policy research, as well as detailed due diligence analysis for specific assets.