Infrastructure offers another investment road

airports, ports and power plants pushed prices higher.

Investment in global infrastructure assets hit a record $413 billion, a rise of 14 per cent on the year before.

However, as with all investment, there are pros and cons to putting your money into infrastructure.

In the UK we have seen controversy over the Private Finance Initiative (PFI) – a more expensive route than direct financing though it is argued that projects are run more efficiently than they would otherwise have been, so justifying the premium.

The Shadow Chancellor John McDonnell has said a future Labour government would end the “scandal” of PFI, review all contracts and bring such schemes “back in-house” if necessary. Infrastructure is categorised as: Utilities: electricity, gas, communications and water.

Transport : airports, roads, seaports and rail.

Social: education facilities, hospitals, prisons and associated activities.

Back in 2014, but still valid, investment house AMPCapital described infrastructure assets as offering investors “a strongly differentiated set of characteristics compared to other asset classes”.

It stated: “These characteristics may include the provision of essential services, significant barriers to entry and a generally dominant market position; long duration assets, often with a life of 30-plus years, have high upfront costs, but low ongoing operational costs; long-term, stable cash flows, generally with low volatility compared to other asset classes; and inflation-linked contracts and pricing that protects investors from the effects of inflation on long-term cash flows.

“Volatile and uncertain markets are highlighting the benefits infrastructure investment can bring to an investor’s portfolio.” JP Morgan has a similar take. As long ago as 2009, it noted: “Because most infrastructure assets have monopolistic positions in and provide essential services to the markets they serve, demand is often very stable. Usage does not materially decline with price increases or during periods of economic weakness.

“As a result of low usage volatility, economic insensitivity, and inflation-protection characteristics, a portfolio of infrastructure assets has low correlation to other major asset classes resulting in compelling diversification benefits.” JP Morgan listed various risks. It said: “Regulatory decisions may be inconsistent, increasing uncer- tainty for investors.

“Development projects face higher construction risks and demand uncertainty compared to mature assets.

“Due to the size of some assets, the limited number of potential buyers and regulatory approval requirements, divestments of infrastructure assets can take a significant amount of time and effort.”

In a further paper released in August, it added: “Investors have increasingly recognised the importance of an infrastructure allocation, and assets under management have grown substantially in recent years. Infrastructure continues to offer diversification, inflation protection, and yield that investors may struggle to find elsewhere in a challenging, low-rate market environment. Consequently, we believe that infrastructure valuations have room to increase further.”

Nevertheless, only a relatively small exposure to this asset class is advisable for most investors. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice