Infrastructure CPD course  

How infrastructure fits within a portfolio

This article is part of
How retail investors are getting into infrastructure

How infrastructure fits within a portfolio

Infrastructure investment, essentially, is putting money into hard assets that provide an essential service to an economy.

This could be through investing in housebuilders or rail operators, energy companies or healthcare. 

Mike Pinggera, manager of the Sanlam Four multi-strategy fund, says infrastructure – or ‘real assets’ – is the way in which government and industries must address various challenges, such as rising life expectancy and population density.

He says: “There are many businesses around the globe investing in real assets to fulfil the needs and requirements of bigger populations”, and calls them the “pillars of a functioning economy”.

By committing to infrastructure spend, the aim is to improve the overall economic and societal environment.

For example, the UK government in the 2016 Autumn Statement, announced the creation of the National Productivity Investment Fund.

This aims to provide more than £23bn of “high value investment” between 2017 and 2022.

The Budget 2017 documents cited the fund will: “Focus on priority areas critical for improving productivity: economic infrastructure, housing and research and development.

“This built on existing plans for major investment over this parliament, including resurfacing 80 per cent of the strategic road network and the largest investment in the railways since Victorian times.”

It also includes setting aside £740m in digital infrastructure to improve the UK’s mobile and broadband services. 

Because of such commitments, James Smith, portfolio manager for Premier Asset Management, says infrastructure can be less cyclical, owing to the longer-term nature of projects.

He explains: “Clearly, individual stocks perform differently within any sector, but generally, the infrastructure sector is less cyclical and therefore less volatile than global equities.

“We see the essence of managing an infrastructure portfolio as aiming to achieve long-term equity-like returns, but with less risk.”

Different performance profiles

Figures such as this indicate the amount of money being put to work in various infrastructure products, but, as Nick Langley, co-chief executive and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate, points out, it is imperative to understand where in the infrastructure universe a retail investor should be, as different assets have different risk and return profiles.

Mr Langley says there are four main asset types to consider when it comes to infrastructure. He outlines them as: 

Community and social assets – traditionally funded with public sector involvement, and which have a “clearly visible beneficial impact on society”, although these may have a lower return and limited growth potential.

Regulated assets – for example, energy companies and water utilities, which operate in regulated markets. This means their return profiles are affected by the regulator of their particular industry.

User pay assets – these tend to be unregulated, and are involved with moving people around an economy. For example, it could be investing in companies that operate road and rail networks, airports and ports.