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What advantages and opportunities does the asset class provide?

This article is part of
Guide to investing in infrastructure

What advantages and opportunities does the asset class provide?

A number of characteristics have helped infrastructure become a useful allocation in investors’ portfolios.

There is the inflation linkage aspect, as mentioned earlier in this guide, which in an inflationary environment is even more appealing.

Infrastructure also has an income element to it which, when other more traditional asset classes are struggling to meet investors’ income needs, makes it very attractive.

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Then there’s the fact it adds another layer of diversification to a client’s portfolio. 

The asset class seems to tick all the boxes, with both growth and income investors benefiting from exposure to infrastructure.

Insulated from inflation

Peter Meany, portfolio manager, First State Global Listed Infrastructure fund, points out: “One of the key benefits of listed infrastructure is its ability to insulate investors from the effects of inflation.

"Our companies' regulated or contracted agreements allow them to increase prices by inflation. This price increase is borne by customers. It makes the company more profitable so it's beneficial for shareholders.

“Many infrastructure assets, including utilities and toll roads, have explicit links to inflation through regulation, concession agreements or long-term contracts.

"Other assets without an explicit link, such as US freight railroads or mobile towers, often have the pricing power to deliver a similar (or better) outcome, reflecting their strong strategic positions.”

Adam Burniston, model portfolio manager at Thesis Asset Management, gives an example of how this inflation protection works.

“INPP, one of our primary infrastructure exposures, has an inflation ‘linkage’ of 89 per cent (the highest in the peer group) - that is to say that for every 1 per cent of inflation in the economy, INPP’s revenues grow by 0.89 per cent,” he says. 

“This is a good starting point on which to develop a growing revenue stream.”

Nick Langley, co-chief executive officer and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate, estimates more than 80 per cent of the cashflows of companies in which the Legg Mason IF RARE Global Infrastructure Income fund invests are either directly or indirectly linked to inflation.

But it’s not just that infrastructure provides a form of protection against rising inflation.

The asset class also has a stable risk return profile, as Mr Langley explains.

“As infrastructure companies are typically involved in the provision of an essential service (often over a long time period), backed by hard assets, while having a degree of price certainty (a regulatory framework or long-term contract), we see the risk/return profiles on offer in the sector being very stable over time. 

“While any return will involve some degree of risk, the nature of the asset class means that skilled investors can potentially achieve a return that more than compensates for the risk incurred,” he notes.