Why Invest in Infrastructure Assets

What Are Infrastructure Assets?   

Infrastructure is the physical assets that provide an essential service to society. These are the services we use and interact with every day. For instance, we use gas, water and electricity to carry out our daily activities and we also use infrastructure, such as airports, rail and roads, to move people and goods from location to location.

Our infrastructure investment process is designed to leverage the observation that, over time, asset valuations reflect long-term cash flows. As a result, our specialist team focuses on the infrastructure assets that display more predictable cash flows.

Broadly, infrastructure can be categorised into:

With regulated assets, such as water, electricity and gas transmission and distribution, the regulator determines the revenues that a company should earn on their assets. If an asset earns too much, then the company is required to return some of its revenues to its customers by lowering prices. Conversely, if the asset earns too little, then the company is able to increase its prices. Because demand for these assets are steady and the regulator determines revenue, this mechanism leads to a relatively stable cash flow profile over time. Additionally, the regulator periodically takes into account inflation and bond yields, which means price increases are often linked to inflation and long-term valuations are relatively immune to changes in bond yields.

With user-pays assets, pricing is generally set by contracts, however volume and therefore revenue is determined by how many people use their assets. These physical assets namely rail, airports, roads and telecommunications towers, move people, goods and services throughout an economy. Therefore as an economy grows, develops and prospers, demand for these assets also typically grow. For instance, as more people use, and to some degree depend on mobile phone data, we see mobile communications towers adding additional capacity to the physical towers to meet this demand.

Investment Characteristics of Infrastructure

Within a portfolio, the infrastructure asset class offers investors the potential for:

Due to the essential nature of infrastructure assets, demand is relatively stable and may provide lower volatility than traditional equities. Even at times of economic weakness, consumers continue to use water, electricity and gas, drive cars on toll roads and use other essential infrastructure services.

Infrastructure companies provide predictable income distributions due to stable earnings derived from the underlying asset. Regulation and/or long-term contracts provide stable cash flow and greater capital stability, which may provide visibility for revenues and dividends.

Most infrastructure assets have an explicit link to inflation through regulation, concession agreements or contracts which can provide inflation protection to investors.

Infrastructure can act as a good alternative diversifier in a portfolio, given its lower correlation to asset classes such as equities and bonds. This is because the underlying return streams are linked to regulatory or contractual frameworks, rather than typical drivers of equity and bond returns. This diversification benefit may increase in times of market stress, meaning that infrastructure can provide protection exactly when it is needed the most.

Investing in global listed security markets provides us with the flexibility to take advantage of market movements and the agility to invest where we, as active managers, see the best opportunities for our clients.