Most Popular ArticlesChief Investment Officer, Capital Innovations LLC
September 8, 2009
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With global markets improving, liquidity returning to the credit markets, and valuations improving, the infrastructure market looks promising. Infrastructure assets, when chosen correctly, can diversify an investor’s portfolio because of their low correlation with other asset groups, their consistent returns coupled with lowered levels of risk, and their potential for inflation-linked returns.
What is listed infrastructure?
Infrastructure assets represent a broad mix of the large-scale public systems, services, and facilities of a country or region that are necessary for economic activity to function. Some examples of infrastructure include power generation and transmission, water supplies and wastewater treatment, public transportation, rail, roads, bridges, tunnels, ports, airports, telecommunications, and finally, basic social services such as schools and hospitals. The global listed infrastructure securities market represents a market value of roughly $1.79 trillion. (Source: S&P Listed Infrastructure Assets - A Primer 2009)
Infrastructure has emerged as a differentiated asset class that provides unique investment characteristics. Infrastructure assets provide a necessary good or service to society, and they have high barriers to entry for competitors. Because of the pricing power that results from their favorable market position, regulators typically limit the revenue growth from these assets to the rate of inflation. As a result, infrastructure investments are able to offer long-term stable cash flows that have the potential for inflation hedging.
Infrastructure investments also exhibit a hybrid nature of both fixed income cash flows coupled with capital gains. They behave somewhat like a bond with stable cash flows, but these assets can be improved upon and their capacity can be expanded, allowing for their principal value to grow over time.
Finally, infrastructure investments offer a variety of risk and return profiles. Infrastructure investments range from low-risk regulated assets to moderate-risk loosely regulated entities such as energy production. The assets offer varying amounts of inflation protection and different levels of vulnerability to economic cycles. It is important to note that, while these assets are all considered the same asset class, not all of them will exhibit the same risk and return behavior.
What are the benefits of listed infrastructure investments?
In response to a recent survey conducted by Capital Innovations LLC, high net-worth investors listed the attributes they consider most important in an attractive investment: diversification, liquidity, reasonable fees, valuation/ daily market pricing, transparent corporate governance and active management.
Listed infrastructure can provide these key attributes to your clients in a straightforward and easy to understand framework, differentiating it from many other complex, unlisted (private equity type) investments.
Diversification: There are a series of risk and return elements to any investment strategy. Listed infrastructure permits investors to diversify across “sectors,” which may help to ameliorate some of infrastructure’s inherent risks (i.e., regulatory risk, demand risk, interest rate or refinancing risk). Diversification across regulatory sectors, physical assets, currency exposure and political risks (countries or regions) helps investors construct a portfolio that achieves their desired risk/return profile. A global diversified portfolio of holdings can accomplish this.
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