4 reasons SMSF investors should consider global listed infrastructure
Stable and inflation-linked cash flows and long-term capital growth potential make global listed infrastructure a good fit within an investment portfolio.
In an environment of constrained economic growth and volatile markets, many SMSF investors may be questioning whether their investments will provide stable cash flows and continued capital growth. This is where global listed infrastructure presents a compelling investment opportunity.
Global listed infrastructure securities invest in essential assets such as toll roads and utilities, as well as airports, hospitals and schools. Below are some of the reasons for investing in this asset class.
1. Higher dividend payments than global equities and global bonds
While yields have diminished in recent times, the asset class is still offering higher dividend yields than global equities and global bonds. High operating margins and low maintenance capital expenditure mean infrastructure companies generally offer investors higher dividend payments.
2. Less volatile than other asset classes
Infrastructure assets are often built or regulated in such a way that they face little or no competition. These strong monopolistic qualities provide the asset class with defensive characteristics and mean they are generally subject to less market volatility than other asset classes.
In addition, because infrastructure assets often have their profits guaranteed by long-term contracts or regulation, returns tend to be relatively predictable over time, regardless of the economic or business cycle.
These long-term agreements often last decades and in some cases into perpetuity. For investors, this provides extremely good visibility for revenues and cash flows. The chart below shows that since 1990, global listed infrastructure has generated higher returns with less volatility than a number of other asset classes.
Global listed infrastructure has provided higher returns with lower risk than a number of asset classes
Source: Bloomberg and AMP Capital. Annualised quarterly observations from 2002 – 2014.As at 31 December, 2014. Past performance is not a reliable indicator of future performance.
3. A good hedge for inflation
Inflation is a major threat to investors. When the general price level of goods and services goes up, an investor’s purchasing power diminishes.
Revenues from infrastructure assets are often linked to inflation, either via a regulated return framework or through contractual arrangements. This means infrastructure assets can provide investors with a hedge against the effects of inflation on long-term cash-flows. Some agreements allow an infrastructure company to pass through any commodity expense and interest costs incurred on the debt the company holds. These clauses can serve to insulate investors from uncertainties like commodity price volatility, interest rate increases or inflation.
4. Greater opportunity to diversify
The need for new infrastructure in both developed and developing economies means that there will be a broad and growing range of infrastructure investment opportunities listed on stock exchanges around the world.
One of the key themes that will drive growth in global listed infrastructure is the energy renaissance in North America. This is where an entirely new network of pipelines and other infrastructure needs to be built in order to access and transport the vast amount of shale gas, oil and natural gas liquid reserves in the US and Canada. This is in addition to the significant amount of investment required in building infrastructure in developing countries for the first time, as well as replacing ageing infrastructure in developed countries.
With interest rates likely to remain low over the next few years, the demand for global listed infrastructure is expected to remain high. This is because investors are likely to continue to favour defensive securities that can offer relatively high dividend yield, inflation protection as well as the potential for capital growth.
Until recently, infrastructure investment was only available to large institutional investors due to the significant amount of capital needed to make an investment. Today however, investors can become involved through a number of managed funds and direct investment options, making it a much more accessible option for SMSF investors.
About the author
Tim Humphreys is the head of AMP Capital’s Global Listed Infrastructure Team, based in the Sydney office. He also leads the research effort of infrastructure companies in the Americas. Tim has over 15 years’ experience in the financial industry in the UK and Australia and is a skilled infrastructure analyst.