Peter Meany, head of global listed infrastructure at First State Investments, says infrastructure possesses a combination of qualities that makes it an attractive option for a broad range of investors.
“Infrastructure assets benefit from a combination of defensive fundamentals and a number of structural growth drivers, and have the ability to generate inflation-protected income,” he adds.
As well as being a good inflation hedge, says Darius McDermott, managing director of Chelsea Financial Services, infrastructure is also thought to enjoy low correlation with other assets, low sensitivity to swings in the economy and markets, and long-term sustainable cash flows.
Neil Shillito, director at SG Wealth Management, adds that infrastructure funds can be used to gain access to a particular sector or theme, such as global water shortages.
He adds: “The disadvantage is that all specialist funds are to some extent influenced directly by geopolitics - although this is true of all investing, infrastructure is arguably more exposed.”
Real world examples of such political or regulatory interventions have been proposed changes to regulation affected toll roads in Italy and China, changes to taxation impacted utilities in Germany and Belgium, and the removal of subsidies impacted renewable energy companies in Spain and the US.
Mr McDermott notes that there are other macroeconomic risks attached to infrastructure. “The most significant risk is an eventual rise in interest rates or a blow-out in government bond yields, which would result in lower Navs.
“Sustained, high inflation can also cause pricing pressures and decreased returns for infrastructure players. There is also construction risk, operational and management risk as well as business risk. Also environmental, social and reputational risk to name a few.”
It’s important that investment advisers are clear of the objective that any infrastructure investment serves within the overall portfolio, stresses Mr McDermott, and he recommends advisers take a good hard look under the bonnet when selecting funds, getting a good understanding of the nature of the underlying contracts and associated risks.
Mr Meany concludes: “These risks can be mitigated by using an active fund manager to construct a diverse portfolio of listed infrastructure assets, invested across different countries, sectors and regulatory regimes.”
