How to invest in infrastructure
Infrastructure connects us on the phone and online and helps us to travel by road, sea or air. Without high-quality infrastructure, our economy simply wouldn’t work.
All of this infrastructure takes trillions of dollars of investment to build and maintain, so it makes sense that opportunities exist for investors.
It also offers unique benefits to investors, in the form of long-term and often inflation-protected cash flows.
For investors seeking to diversify their portfolios, infrastructure investments may provide attractive opportunities, along with some pitfalls.
What is infrastructure?
Infrastructure is assets that allow the delivery of essential services that support the economy and the functioning of society. We all use these assets every day – whether it is electricity, gas, water, airports, toll roads, ports and communications infrastructure.
Why invest in infrastructure?
Dependable cash flows
Infrastructure assets typically have a strong position in the industries in which they operate (such as a monopoly or duopoly) that is hard for new competitors to take on. This can be due to a regulated monopoly or simply because massive capital is required to build the assets, resulting in high barriers to entry.
Income from infrastructure typically comes from:
- a return on assets determined by a utility regulator (e.g. water, electricity, gas)
- a long-term contract (oil and gas pipelines)
- monopoly patronage and user charges (toll roads, airports),
This makes future cash flows more predictable than most other assets, which means it can provide investors with steady income yields.
Revenues generated by infrastructure assets are often protected from inflation. This may occur because rates of return are set by regulators and are linked to future inflation or because it is stipulated in a long-term contract. This protection from inflation makes these infrastructure assets attractive to long–term investors as it means the value of their earnings won’t be eroded over time.
Low operating expenses
The main cost of an infrastructure asset is the investment required to build it. Once operational, it will typically have low operating and maintenance costs.
Most infrastructure assets have long economic lives, typically more than 30 years and, in some cases, much longer. If they are regularly maintained, they can be confident of lasting for their entire projected lifespan.
Infrastructure assets provide services that are not discretionary for the user so demand does not fluctuate much with the economic cycle. This helps to deliver steady returns.
What are the risks?
Like other investments, infrastructure carries risks. Typical risks include:
- interest-rate sensitivity and refinancing risk if the asset needs to be refinanced
- regulatory and political risk where the government may move to eliminate a monopoly or reduce service charges
- asset-specific operating risks such as the risk of a leak or explosion in an oil pipeline.
How can infrastructure fit into your portfolio?
Over the past few years, we have seen a lot of market volatility. The defensive characteristics of infrastructure assets mean it tends to suffer from lower levels of volatility compared to many other asset classes - especially stocks - and to deliver steady income throughout market cycles.
Infrastructure also tends to have a low correlation with other asset classes, such as shares and bonds, so it can help investors to manage risk in their portfolios through diversification.
The predictable and stable cash flow delivered by infrastructure assets also helps to deliver regular cash yields to investors.
How to invest in infrastructure
There are a number of different ways to invest in infrastructure. These can include:
Australian infrastructure stocks
Many infrastructure companies are listed the Australian Securities Exchange (ASX). The largest of these is Transurban Group (ASX: TCL), which is one of the world's largest toll-road operators. There is an S&P/ASX Infrastructure Index which tracks two distinct clusters – transportation and utilities. These stocks can be bought like any other stock through a stockbroker.
Infrastructure unit trusts
Some of Australia’s leading fund managers have specialist infrastructure funds that invest in local and offshore listed stocks and are open to retail investors. To invest in the trusts, approach the manager directly.
Infrastructure ETFs invest in a diversified portfolio of infrastructure companies and assets. These can invest solely in Australian infrastructure companies or infrastructure worldwide.
Alternatives to investing in infrastructure
The key advantages offered by infrastructure are reliable cash flow and lower volatility than stocks. Another investment offering these features is Firstmac’s High Livez RMBS fund.
High Livez’ objective is to provide stable monthly income returns from from this portfolio, supplemented by a small allocation towards short-term money market securities.
The fund gives ordinary investors access to the RMBS market, which is usually restricted to professional and institutional investors.
The minimum investment amount is $10,000.
Remember, it is important to get independent financial advice before making any investment, to ensure it is appropriate for your individual financial circumstances.