There are three interesting characteristics that make infrastructure a compelling investment for investors, said Frank Belvedere yesterday at the sixth annual Canada Cup of Investment Management in Toronto.
The first, he said, is long-duration assets, which are very much aligned with pension liabilities. The second is relatively high cash flows that also have a high probability of increasing with inflation, very much like a real-return bond. And the third is monopolistic assets or assets that operate in a regulated environment.
The five sub-sectors of infrastructure are: throughput, which includes roads, tunnels, bridges, airports, rail links, and ports; regulated, such as electricity distribution/transmission, gas distribution, and water distribution; contracted, which includes district energy, power generation, and communications towers; social, such as hospitals, aged care, schools, courthouses, and prisons; and infrastructure related, including parking lots/garages, telecoms systems, and directories.
James Cowan, managing director – office head, Canada at Macquarie North America, explained how some infrastructure investments have a long-term strategic competitive advantage. For example, no one will build a cheaper toll road in China so there’s no risk of competition from overseas.
There are also advantages of investing in infrastructure compared to other investments. “Because most of your money is tied in capital assets and there’s where most of your expenses are,” he said, “management operational risks are much lower than, for example, in private equity or most of the companies that you can buy on the TSX.”
For pension funds looking to invest in infrastructure, there are relatively few private funds to choose from. And it’s a new asset class with a lot of new managers so there’s little historical performance.
“I think overall that’s not a bad thing for two reasons. Number one is it forces us to focus on the qualitative aspects of each management firm,” said Belvedere. “Number two, where historical performance does exist, it may not be all that relevant to expected performance going forward because there were a lot of inefficiencies in the market that have likely disappeared as more assets are flowing into this space.”
Despite the possibility of lower investment returns in the future than in the past, he believes the positives of infrastructure will far outweigh the negatives. “Certainly, infrastructure is here to stay,” he said. I can’t imagine that five or 10 years from now that infrastructure will not be an alternative investment class.”
For more about infrastructure, check out our six-part series, A Trustee’s Guide to Alternative Investments. To read it, click here.
To comment on this story email craig.sebastiano@rci.rogers.com.