How to build a portfolio with infrastructure assets

  • Explain why infrastructure can play a useful part in portfolios
  • Identify the different types of infrastructure assets
  • Explain the investment risks and how to mitigate them
How to build a portfolio with infrastructure assets
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The loose monetary policy measures employed since the Great Financial Crisis and the huge stimulus injections that governments have applied to cope with the pandemic this year have seen financial markets flooded with cash, which has pushed up equity valuations and left more than $17tn of bonds with negative yields. 

This has raised the concern that returns from traditional asset classes have become more and more challenged and led many to question the viability of the traditional ‘balanced’ portfolio of 60 per cent stocks and 40 per cent bonds.

Many are therefore looking to incorporate a greater long-term allocation to alternative assets, including commodities, hedge/absolute return funds, property, private equity and infrastructure.

These are assets that historically have been ‘optional’ on the menu of investment opportunities but may well become a staple ingredient within a well-balanced portfolio structure in 2021 and beyond. 

Infrastructure investing is of particular interest, given that it provides investors with exposure to ‘real’ physical assets. 

So what do we mean by infrastructure assets?

The infrastructure fund management group, Foresight, highlights two main types of infrastructure assets; economic infrastructure and social infrastructure.

It splits economic infrastructure assets into three sub-classes.

Energy and utilities includes bioenergy, power stations, electricity transmission (the grid), offshore and onshore wind farms, solar PV and water utility.

Telecommunications includes cell towers, data centres and fibre.

Transport includes airports, ports, railway rolling stock and toll roads. 

Within social infrastructure it lists care homes, primary care, private hospitals, purpose-built student accommodation, schools, specialised supported housing and local authority housing. 

This gives you a sense of the broad range of assets covered by this asset class (along with the opportunity for diversification and the need for expert management). 

An attractive income

In basic terms, the owners of infrastructure assets receive an income stream based upon either the simple availability of the asset over a given period (availability-based revenue) or the level of usage of the asset (demand-based revenue). 

Toll roads and rail are examples of assets in the latter class that have had a challenging time in 2020 due to rolling lockdowns and reduced consumer activity.

Schools, prisons, hospitals and renewable power generators are assets that have been generating a stable income from governments or government-backed agencies irrespective of the macroeconomic backdrop.

It is this stability in income – often index-linked and contracted over periods that run as long as 20 years – that helps underpin the value of these assets to investors. 

Historically, infrastructure has been available only to large institutional investors and pension fund managers happy to allocate capital for the very long term and accept the trade-off between the stable return profile offered by real assets and their lack of short-term liquidity. 

However, there is now a range of structures – open-ended and closed-ended funds – offering all investors the opportunity to access underlying assets that have in many cases proved their resilience, given they often underpin much of the economic and social infrastructure of society.