Investing in keeping the economy moving

The public-private partnership model which was used to finance and construct much of Ireland’s motorway network is evidence of the attractiveness of infrastructure as an investment. The investor gets access to a steady stream of income, toll charges in the case of roads, over a sustained period with little of the volatility associated with some other asset classes, while the State and the taxpayer also benefit from the upfront capital boost for the piece of infrastructure.

But the term infrastructure applies to much more than roads and refers to the broad range of fixed assets that provide essential services to modern societies, such as energy generation and distribution facilities, sewerage and water systems, major road, rail, air and sea links, and telecommunications installations, according to Paddy Swan, a director with pension and investment advisers Invesco.

“It is a relatively new investment class in this part of the world,” he adds. “There is a lot of demand for that type of investment. It’s really about investments in those activities and things that keep the economy moving – like roads, airports, ports, rail, utilities and so on.”

Essential services

The attraction lies in the fact that because infrastructure assets provide essential services, demand is quite stable with a relatively low sensitivity to the broader economic cycle. This means infrastructure earnings can be quite stable when other businesses might struggle. “These attributes can represent both a strong source of dividend income and an inflation hedge for a diversified portfolio,” says Swan.

The emergence of infrastructure as a new asset class in itself began in Australia and Canada in the 1990s and has slowly spread to the rest of the world. There are two main ways of investing in the asset – one is the Canadian model which favours direct investment in the individual infrastructure assets. As of the end of 2018, volume of such assets was about €432 billion globally and accounted for just about 0.5 per cent of institutional portfolios.

However, the other method is to invest in global listed infrastructure. While only very well-off investors can afford direct ownership of infrastructure assets, the development of listed infrastructure funds allows smaller investors to participate in the asset class.

This allows investors to invest in infrastructure in the same way as they would invest in equities. These specialist global listed infrastructure funds offer investors a professionally assembled and managed exposure to infrastructure with the added advantages of diversification and ready liquidity.

According to Swan, they also offer correlation to the global stock market – about 90 per cent of the gains and 60 per cent of the falls. Most of the upside in rising markets, and much less of the downside when they are falling.

Of course, it is not all one-way traffic and there is catastrophe risk to be aware of – the possibility of a natural disaster or other event destroying an asset.

“It is a small but significant investment area for us,” says Swan. “We got involved in it a couple of years ago and we are glad we did.”