Spotting an investment trend before it happens
We often get asked whether global listed infrastructure is an asset class that should have its own discrete allocation within a portfolio.
One of the most fruitful ways for SMSF investors to make serious money from investing is to spot a hidden gem. That is, an investment or trend that’s not yet widely recognised by the market. Global listed infrastructure has only been used as a discrete investment for less than 10 years and, in our view, is at a similar juncture to where real estate investment trusts (REITs) were in the 1980s. Several decades into the growth of the REITs market, most SMSF investors would now agree that this investment is indeed an asset class of its own and if you had waited until it was widely accepted as having this status, you would have missed out on a huge investment opportunity.
Demand for infrastructure assets is set to rise
There is widespread recognition from SMSF investors that direct infrastructure provides attractive investment characteristics - stable cash flow, high yields, performance which is uncorrelated to gross domestic product (GDP) and inflation protection to name but a few. As such, over the past 10 years or so, there’s been a surge in demand for infrastructure assets. To put this into perspective, the total amount of infrastructure assets held by investors has risen from around US$160 billion in 2010 to approximately US$300 billion as at September 20141 . Despite this, we expect that demand will continue to rise – in fact, Preqin estimates that some US$101 billion remains in committed and undrawn capital – a number that’s increased by 45% since 2010.
A liquid way to play a very illiquid asset class
When looking at global listed infrastructure, the size of the market is already around US$2.6 trillion2, and growing fast. The size of the market can provide SMSF investors with a very liquid way to gain exposure to what is otherwise a very illiquid asset class. Indeed, it’s quite possible that a large portfolio of several hundreds of millions of dollars can be fully invested within a few days. By investing in a portfolio of large, liquid stocks, SMSF investors can benefit from immediate exposure to some of the best infrastructure companies worldwide in a diverse set of sectors and regions, thereby replicating a portfolio of direct infrastructure assets, in a liquid, listed environment.
An ageing demographic should also underpin demand
Another trend which is likely to underpin rising demand for global listed infrastructure is the ageing demographic globally. The World Health Organisation forecasts the proportion of the world’s population over 60 years will double from about 11% to 22% between 2000 and 20503. This trend will not only lead to an increase in the number of people in retirement but also an increase in the number of years they spend in retirement. In light of this, we believe that pension funds will need to increase their allocation to liquid assets in order to meet their liabilities as they fall due.
As more and more pension funds enter their draw-down phase, we believe they will be forced to sell illiquid assets and buy defensive liquid assets such as listed infrastructure. By selling direct infrastructure assets and investing part of the proceeds into listed infrastructure, this should provide a similar asset exposure along with an immediate supply of capital when needed.
Investors are allocating away from equities and fixed income
It’s not just direct infrastructure investors who are allocating to listed infrastructure. We are also seeing investors who have a large allocation to global equities use listed infrastructure as a means to ‘de-risk’ their equity exposure. Indeed, global listed infrastructure has historically demonstrated a low correlation to global equities in down markets. We are also seeing investors who have large low-returning holdings in fixed income looking to global listed infrastructure as a way to enter equities in a relatively safe and defensive way. Many of these investors are seeking attractive returns uncorrelated to global GDP, so global listed infrastructure is an obvious place to look to invest.
We are beginning to see an increasing amount of investors starting to make discrete allocations to listed infrastructure. As allocations rise, then we expect to see significant amounts of new capital enter the space. What this means is that at some point in the next few years, we believe it’s inevitable that global listed infrastructure will be recognised as its own unique asset class. The question that SMSF investors need to ask themselves, however, is whether they want to invest now and benefit from the expected growth in the asset class – or do they want to wait for the investment trend to be increasingly recognised?
To find out how you can invest into a diversified portfolio of global listed infrastructure securities, read more.
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. Tim holds a Bachelor of Engineering with Honours from the University of Sheffield.
1Preqin, Quarterly Update: Infrastructure, Q1 2015, released April 2015
2AMP Capital, Bloomberg, as at 31 December 2014
3World Health Organisation, Facts about ageing, 2014