Infrastructure as an Asset Class

It’s hard to escape it… in almost every major city around the globe there are large scale infrastructure projects in progress and many of these are funded by private companies.

With so much constant activity within this sector, it can be beneficial for investors to treat infrastructure as a separate asset class for investment, rather than lumping it in with the equities part of their portfolios.

This is a key point of difference in the way that First Financial builds client portfolios, and we spoke to Adam Ezerins, Financial Adviser, about some of the benefits.

Essentially, infrastructure consists of physical assets and any of the associated operations that provide essential services to the community.

This can include transport related infrastructure such as bridges, tunnels, major roads and airports, or technological infrastructure such as network towers or other utilities like gas or electrical energy and water services.

The infrastructure asset class does not include commercial or residential property development.

Adam explains,

“Many governments around the world look for opportunities to minimise their expenditure. They can reduce the amount they spend building infrastructure by partnering with private companies… for example Transurban in Melbourne currently oversees the West Gate Tunnel project.

Effectively, Transurban provided the funds to pay for the project, and as a result they will have a toll on the tunnel so they earn the revenue… and recoup the funds they committed to build that specific piece of infrastructure.

It’s a great example of infrastructure that is needed in this city and how the government has encouraged private partnership in order to meet the needs.”

One of the main reasons we like including infrastructure in a portfolio is because it brings a great element of diversification. It can provide a relatively stable, reliable source of income that is paid regularly.

Income tends to be a more reliable source of return from investments than capital growth, which can be more volatile.

When investments pay a reliable source of income, it helps to top up cash in the portfolio to ensure clients can meet their drawdown needs.

Adam says,

“We look at both Australian and international infrastructure opportunities. We tend to select a mix that is spread geographically. As part of our international infrastructure assessment, we aim to manage the currency risk through hedged investment options. We seek to remove that risk from the portfolio and it becomes more about how well the investments perform, rather than the currency.”

At First Financial, our investment philosophy drives all the decisions we make when building a portfolio. We have a strong focus on stable income streams and strive to put money back into investors’ pockets. Whether that is through superannuation or an investment account, the same premise is applied.

Adam highlights how we approach this differently,

“When you look at a traditional example… if you have your investments in an industry fund, all the investments are pooled together so there is no separation of infrastructure as an asset class. By allocating funds to infrastructure specifically, we are making sure that portfolios are more diverse.

If you look across any equity type investment, like Australian shares, there are some companies that are more growth oriented and others that are more income oriented. By having a separate target asset allocation for infrastructure, you focus your energy on income… which is much more in line with our investment philosophy of managing stable cash flow.”

Adam continues,

“As with any investment, the return can vary. Transurban, for example, has increased in value significantly over the past few years because people are looking into the future and seeing that we will probably have low interest rates for longer… so we need to find alternatives that offer a better income return.”

Adam concludes with this extra positive note,

“Most people in Melbourne are spending money on their tolls when they travel… at the end of the day you can have a small smile on your face when you do go through the toll gates, because the beep means there’s a bit of extra revenue going into your shares which can hopefully be passed back to you in the form of a dividend.”

To find out more about building a diversified investment portfolio, contact our team today. Read another investments article.