“However, for investors that cannot tolerate volatility within that part of the portfolio, we seem them putting listed infrastructure into the global equities bucket, effectively carving off a segment of lower risk and higher-yielding exposure within global equities for listed infrastructure.”
Balance is the key, as Mar Beltran, senior director, infrastructure lead for Europe, Middle East and Africa in the infrastructure ratings team for S&P Global Ratings, suggests.
Mr Beltran says: “Within a balanced investment portfolio, investors may look towards infrastructure for growth.
“It can provide stable and inflation-linked cash flows and capital growth potential over the long-term.”
He adds the portfolio split between listed and unlisted infrastructure will typically be approximately 30 per cent to 70 per cent.
Mr Langley adds investors can sometimes put listed infrastructure within the ‘real assets’ portion of a portfolio. He explains: “This reflects the hard assets that are owned by the companies in which we invest, along with the often inflation-linked cash flows provided by these assets.”
Visibility of risk and return
Andy Ho, chief investment officer for VinaCapital, believes using infrastructure also helps with the visibility of risk and return profiles.
He says: “For example, when we make an investment into a toll road operator, we know the return is the internal rate of return (IRR) the government is giving the company.
“Although there could be management and operational risks, generally infrastructure stocks are seen as less risky than some other sectors as they are less dependent on macro factors.”
Kim Barrett, chartered adviser for Barretts Financial Solutions, agrees. He says: “Infrastructure is gaining in popularity and you can understand why. For example, with the government leasing out its buildings, investors are reassured they have good quality tenants. This helps minimise risk.”
He uses HICL’s investment trust for infrastructure exposure for clients, especially those who want visibility when it comes to dividends.
The £2bn trust’s principal objective for shareholders, according to the factsheet, is “To deliver predictable and sustainable dividends which are derived from the stable, inflation-correlated cashflows from the underlying infrastructure projects.”
Income prospects
Mr Smith also highlights the “alternative source of income and growth opportunities” that infrastructure can bring to a portfolio.
It has been a well-worn mantra this year that we are in a ‘lower for longer’ environment for returns, with fixed income yields becoming compressed, forcing income investors either up the risk curve to emerging market debt or high-yielding equities, or to investments such as property, which can offer a yield through rental income.
However, higher taxation and greater red tape on residential property, along with many investors getting their fingers burned in July and August 2016 after most daily dealing UK commercial property funds gated themselves against redemptions, has put some investors off this route.
