Generally, infrastructure assets are natural monopolies that provide an essential service to the community. Infrastructure assets offer investors protection from the impacts of inflation because their earnings generally have some direct linkage to inflation. Over time the stable, reliable earnings of infrastructure assets are expected to lead to a combination of income and capital growth for investors.
When you invest in infrastructure your money is used to invest in infrastructure projects like roads, railways, ports, airports, telecommunications facilities, electricity generation, gas or electricity transmission or distribution, water supply, sewerage or hospitals.
Infrastructure is a long-term investment and some projects may take a long time to generate cash flows. Fund managers with the expertise in this area seek to buy and hold an investment portfolio of what they regard as outstanding infrastructure companies and aim to invest in infrastructure and utility companies that possess attractive fundamentals at prices that enable the Fund to achieve superior risk adjusted returns over a 3 to 5 year period.
For example, the Magellan Infrastructure Fund notes that the universe of infrastructure assets that they consider is made up of 2 main sectors:
- Utilities, including both regulated energy utilities and regulated water utilities. We estimate that utilities comprise more than 75% of the potential universe for the Fund. Utilities are typically regulated by a government sponsored entity. Such regulation requires the utility to efficiently provide an essential service to the community and, in return, permits the utility to earn a fair rate of return on the capital it has invested in its operations. As the utility provides a basic necessity, e.g. energy or water, there is minimal fluctuation in demanded volumes in response to the economic cycle and the price charged for the utility service can be adjusted with limited impact upon demanded volumes. As a result, the earnings of regulated utilities have been and are expected to continue to be stable irrespective of economic conditions; and
- Infrastructure, which includes airports, ports, toll roads and communications infrastructure. Regulation of infrastructure companies is generally less intensive than for utilities and allows companies to accrue the benefits of volume growth i.e. the returns of infrastructure companies are linked to growth in passengers, vehicles or containers. As economies develop, grow and become more inter-dependent, we expect the underlying level of aviation, shipping and vehicle traffic to increase. As a result, the revenues and earnings derived by infrastructure assets are expected to grow.
Both utilities and infrastructure companies provide an essential service while facing limited (if any) competition, and, because the service is essential, the price charged for the service can be adjusted with limited impact upon demanded volumes. As a consequence, earnings are considerably more reliable than those for a typical industrial or mining company.
To find out more about investing in infrastructure please contact your adviser as WLM for more information.