Infrastructure – the case for an allocation
Over the past five years there’s been a noticeable rise in infrastructure allocations by investors – what’s driving this demand?
Over the past five years there’s been a noticeable rise in allocations to infrastructure, driven by a desire from investors for income, inflation hedging, a low correlation with other asset classes, and, where possible, liquidity.
Unlike other asset classes, investors use infrastructure for a variety of different roles in portfolio management. This is evident from the variety of benchmarks that are used for infrastructure investment. Generally, investors will look to infrastructure to provide strong equity-like returns with low bond-like risks, and serve as a first-order proxy for long-dated liabilities.
Studies have shown that by adding listed infrastructure to a mixed asset portfolio, performance can be enhanced.
Historically, infrastructure investing was largely confined to institutional investors who obtained exposure to infrastructure by investing directly in these assets. Now, infrastructure investment exposure can also be obtained by SMSF investors, by investing in listed infrastructure funds that buy into the shares of publicly listed companies which own and operate infrastructure assets.
How much to allocate?
The portion an investor chooses to allocate to infrastructure investment will depend on their tolerance for illiquidity and volatility – we generally suggest 10-15% of a diversified portfolio should be allocated to infrastructure assets.
Practical applications of listed infrastructure
We believe there are a number of ways listed infrastructure can be applied to portfolios. As the global search for yield continues, defensive asset classes such as fixed income and cash are expected to generate increasingly lower returns. This means that ‘bond proxy’ asset classes such as infrastructure will continue to be supported by ongoing capital flow.
Listed infrastructure can also be added to an unlisted infrastructure portfolio to provide a liquid source of long-term income, as well as inflation hedging properties and low correlations with other asset classes.
The flexibility of global listed infrastructure allows it to play many roles in an overall portfolio, such as diversification, relative value and liquidity. These characteristics are being more and more recognised by sovereign wealth funds and pension funds globally who are increasingly seeing global listed infrastructure as an important component of their overall infrastructure portfolio.
All investing involves risk, and you should consider investment risks before making an investment decision. One of the key risks of investing in infrastructure assets is illiquidity, and it should be noted that this risk still remains even if listed and unlisted infrastructure assets are blended. While every care has been taken in the preparation of this paper, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and 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 paper 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 paper, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This paper 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.
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.