Boring is beautiful if infrastructure makes money
INVESTMENTS in infrastructure funds are increasingly a part of mainstream portfolios.
However, Covid has muddied the waters.
On the upside, as governments divert revenue to critical healthcare services and economic stimulus, demand for private sector investment in infrastructure will balloon, some predict.
According to a recent McKinsey study, the global bill for ageing roads, outdated railways and undersized airports stands at $5.5 trillion.
On the downside, air travel and airports have been massively hit by the pandemic as so few people are willing or able to fly.
As this column has previously mentioned, there are two schools of thought on investing in infrastructure.
Alex Araujo, fund manager at M&G Investments, told IFA Magazine:
“Infrastructure holds an important place in the fabric of modern society, serving as the backbone of the world economy. In its broadest sense, infrastructure refers to assets associated with the provision of essential services for the functioning of global society such as utilities and transportation networks.
“These types of businesses typically provide stable and growing cash flows, often backed by inflation-linked revenues and the predictability derived from longterm contracts.”
Jesse Griffiths and María José Romero, of the European network on debt and development, counter: “Infrastructure projects are inherently risky and frequently unprofitable, which makes them unattractive to investors.
“Privately-financed infrastructure often ends up costing the public purse in the shape of bail-outs, subsidies or risk guarantees, as countless examples of failed Public Private Partnerships can testify.
“There are many reasons why an infrastructure asset class is a bad idea – not least because it assumes that infrastructure investments are simply another type of tradable asset. It ignores the uncomfortable fact that they are physical, concrete buildings, bridges, clinics or water pipes, which millions of people rely on in their everyday lives.”
The key to infrastructure funds is that they should provide a steadier, less volatile growth path than general equity funds.
Gerald Stack, of Magellan Financial Group, told Livewire Markets: “Because infrastructure assets generate reliable earnings and cash flows, investors seeking portfolio diversification benefits should embrace ‘boring’.
“As an asset class, infrastructure generates predictable long-term returns for investors with low levels of risk. The magic of investing in infrastructure is not in getting rich quick, but in growing wealth in a predictable manner over the long-term.”
Tim Humphreys, of Ausbil Investment Management, stated:
“It’s easy to be tempted by industries and companies that are on the fringe of infrastructure – by following either a trend or a crowd, or by chasing returns where share prices have done well or industries are growing.
“Infrastructure investing is a whole-of-lifecycle approach. This distinguishes it from the earningsmultiple driven world of general equity investing.
“A great example is the current frenzy over the energy transition from fossil fuels to renewables and a decarbonised world. What will this look like in 30 years, and how will the current assets of a company be affected?
“Be conservative and focus on quality. If I can find a stream of cash flows that gives me good upside from the current share price – even using bearish assumptions – then that’s a great starting point in infrastructure.
“The more aggressive and ambitious you have to be in your financial models to get a decent upside, the greater the risk of disappointment and loss.”
Sarah Shaw, of 4D Infrastructure, claims the category is “in a true global ‘sweet spot’ of investment opportunity”.
She points towards stocks with monopolistic market positions or high barriers to entry, earnings underpinned by contract or regulation, and inflation hedges.
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