3. Are infrastructure assets risk-free?
While infrastructure offers several important diversification benefits to a multi asset portfolio, it’s important to understand the range of risks associated with the asset class. Firstly, many infrastructure assets remain vulnerable to political risks. A government could theoretically decide to requisition or nationalise infrastructure assets and though this is generally more of an issue in emerging markets, it was a consideration for us last year in the UK due to the Labour Party’s election campaign rhetoric.
Additionally, infrastructure assets are often strongly regulated and can therefore be highly sensitive to regulatory risk. Utility type assets are often most susceptible to this type of risk, with rules often being set by governments on the quality of the infrastructure that needs to be maintained, which can be very costly. Alternatively the maximum amounts can be charged to protect customers to counter monopolistic unlimited pricing power. Changes in these regulations can affect the attractiveness of an infrastructure investment opportunity.
Lastly, valuations of projects within infrastructure are based on models which discount future cash flows, inflation and interest rate movements into the present, and therefore are sensitive to small changes in long-term assumptions. If any assumptions at acquisition are wrong, valuations will change, causing investors to overvalue or undervalue the costs of projects’ cash flows greatly over a decade or two. Robust, fundamental analysis is therefore critically important - within Fidelity Multi Asset we stress test our assets’ performance across a range of market scenarios, making sure our projections have downside risk fully built in.
4. How can infrastructure complement a portfolio?
Within multi asset portfolios, infrastructure can play a strategic role as both an equity-like return and income generator. Its asymmetric qualities versus traditional asset classes may also prove particularly important, given the current economic uncertainty and volatility we’re seeing in markets today.
Nonetheless, when investing in infrastructure - as with any asset class - it is extremely important to scale positions intelligently, constructing a portfolio with risk spread across underlying investments.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in small and emerging markets can be more volatile than other more developed markets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0720/31723/SSO/NA
