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

The level of disclosure provided within the publicly available infrastructure fund universe means it is relatively easy for investors to compare and contrast the potential returns from assets and decide how best to allocate portfolio capital for the future. 

Returns are attractive, with income yields as high as 6 per cent.

Infrastructure as an asset class also now has a proven long-term track record in generating additional capital growth for investors.

When compared with a yield to maturity on the UK 10-year Gilt of 0.3 per cent and the 30-year Gilt of 0.9 per cent, the underlying attraction of infrastructure funds is very clear – particularly in an environment where income itself is hard to come by.    

Sustainability opportunities

The focus on ESG and the global progression towards net-zero carbon emissions are additional, policy-led tailwinds that should ensure infrastructure investment remains on an investor’s radar for many years to come.

Global ESG equity funds saw an inflow of $3.8bn in the last week of October – the 42nd week of inflows this year – and we are seeing almost weekly announcements from governments regarding their own ‘green’ initiatives. 

In the UK we are looking to ‘Build Back Better’, including investment in electric vehicle (EV) charging infrastructure and renewable energy projects to achieve net zero by 2050.

Further afield, the Australian government granted ‘major project’ status in October to a $36bn renewable energy initiative that aims to build the world’s biggest power station and export green hydrogen from Western Australia to Asia and Europe. 

Infrastructure investment risks

Of course, no investment – and particularly one that offers such relatively attractive returns – can be free of risk. The usual warnings should be borne in mind by investors.

Liquidity risk. Underlying infrastructure assets are long-term by their very nature, so there is not a ready market to buy and sell them on a daily basis as there is with company shares and other tradeable securities. 

Open-ended (Oeic) vehicles provide daily liquidity and a generally high level of transparency and have appropriate levels of regulatory oversight.

But one only has to consider the recent closing of property funds (at times of market stress) to understand that holding long-term assets within a daily traded open-ended structure can sometimes lead to liquidity mismatches when all investors are running for the same door, and we know this imbalance can often take time to correct. 

Discount/premium risk. Closed-ended infrastructure vehicles (investment trusts) do not suffer this issue but the share price can trade at a premium or discount to the value of the underlying assets.

At times of market stress investors have often had to accept substantial discounts being applied to share prices in order to be able to exit and move on.