How to Profit From Infrastructure

How to Profit From Infrastructure

My name is David Holder, Senior Analyst at
Morningstar. I’m here today to talk with Nick Britton, Head of Intermediary Communications
at The Association of Investment Companies. Hello, Nick. Hi, David. Nick, we’re here to talk about infrastructure.
So, could you quickly or briefly explain about what infrastructure means within an investment
context? Well, infrastructure is a very broad asset
class. It encompasses everything from the pipes in the ground like a gas transmission
network or water network to airports, to social infrastructure such as hospitals, medical
centers, libraries. But basically the easiest way to think about it is everything we really
rely as an economy and as a society for our daily lives. So, an extremely broad set of investment potential.
We often hear about the pilot state of U.K. infrastructure. How much more do we have to
spend or invest on infrastructure and where are those funds going to come from? So, the Infrastructure and Projects Authority
actually estimates we need to spend GBP600 billion on U.K. infrastructure over the next
10 years. And of that they are expecting about half to come from the private sector. So,
that obviously raises quite lot of questions about exactly how we’re going to fund it,
what mechanisms are going to be used to allow private investors to access this asset class
in a way that’s both good value for money for the tax payer but also attractive for
investors, and that’s the real challenge, I think for the next few years. Okay. And what are the benefits, do you see
the characteristics – the investment characteristics of infrastructure? Sure. Well, infrastructure has low correlation
with other asset classes, although it depends a little bit on how you access it. But that
certainly can be one of the benefits, low correlations, predictable revenue streams,
cash flows which can convert into predictable dividends for investors, attractive levels
of income compared to equities and bonds in an environment where obviously yields are
being squeezed on conventional asset classes. So, it’s got several attractions really for
investors. But the important thing is that you don’t necessarily access all of those
benefits by investing in anything that’s got the word infrastructure in the name of the
products. Sounds very promising for investors, but of
course there is always risk with investment. So, what would you highlight in terms of the
risk that investors should be aware of when considering an infrastructure investment? So, because this is an asset class that is
really built on predictable revenue streams, what you’ve really got to ask is what are
the risks of those revenue streams becoming not quite so predictable. And so, you have
elements of political risk. If you are looking at infrastructure which is, for example, contracts
with the government or underpinned by regulation, what is the risk of political changes or regulatory
changes that are going to adversely impact that investment. Then at the other end of the scale, where
you’ve got infrastructure, which is more exposed to the market or more exposed to demand, then
obviously you’ve got to look at what factors could influence demand for the asset or you
know in the case of market based infrastructure investing competition and the normal market
forces we think about. So, it really depends on what kind of infrastructure you are investing
in and how you’re accessing that asset. Okay. So, those – the nature of the infrastructure
investment at the sort of micro level, but for investors, how are they – what are the
options available to them? So, you basically got two options, you’ve
got open-ended infrastructure funds and also ETFs which invests in quoted companies across
the world with an infrastructure flavor. So, these will be trading businesses that might
be utilities, for example, or companies that construct and operate and maintain infrastructure. You’ve then got the closed-ended side, you’ve
got – because of the closed-ended nature of an investment company, infrastructure investment
companies that can access a much broader range of assets and contracts, so they could invest
directly into an infrastructure project, for example, the contract to build and maintain
a road for a 30-year period or something like that. And they can access more directly those
predictable revenue stream that I’m talking about. So, you can do it in either way, but
you have to be aware of the different risks there and the different return profile you
are likely to get. And with regard specifically to closed-ended
investment, you know these trusts do not tend to trade around NAV, so they can move quite
aggressively at a premium to a discount. So, that’s an additional risk also that investors
should generally be aware of. That’s absolutely right and you know these
things are investing in unquoted assets and the valuation of an unquoted asset would always
be an educated guess. And so, when you have these big premiums or big discounts, that’s
in effect the market saying, we don’t really agree with the valuation that’s in the latest
annual report. And so, although the discounts and premiums move around quite a lot, it’s
really the income stream from these infrastructure investment companies that is key to keep an
eye on, and they should of course be considered long-term investments because of the potential
for share price volatility. Absolutely. Thank you, very much. Very interesting. Thank you. My name is David Holder. Thank you for watching.
Good bye.

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