Infrastructure investing is becoming a buzzword among fund managers and advisers, but what does the lay investor know about it, and do they understand where it could fit into a portfolio?
The first thing to consider with infrastructure investing, according to James Smith, manager of the Premier Global Infrastructure Income fund, is that it “depends on the investor”.
Taking the investor’s investment goals, risk profile, suitability and loss aversion into consideration has to be the foundation-stone of building any portfolio.
From this, an adviser can build a portfolio, basing this on what sort of exposure an investor should have to infrastructure, and how it will work with the other assets within that portfolio to help diversify the risk and help improve returns.
Diversification
Adding to the overall asset mix within an investment portfolio is one of the benefits of infrastructure stocks or funds, specialists have claimed.
William Argent, fund manager at Gravis Capital Management and fund adviser to the VT UK Infrastructure Income Fund, says: “Infrastructure investments may provide diversification benefits from other asset classes.
"This is because the performance of underlying assets – whether they be solar energy parks, student accommodation or transport links – are typically uncorrelated to the performance drivers of equities, for example.”
Mr Smith opines: “We believe an infrastructure fund can offer good diversification characteristics as part of a broader portfolio.”
Some financial advisers would agree. Chris Leyland, deputy chief investment officer for Newcastle-headquartered financial advice firm True Potential, also believes it can be an important diversifier.
He comments: “Infrastructure can offer a bond-like return profile and sits well within an income portfolio.
“Infrastructure assets act more as a diversifier for bond exposure rather than equity exposure.”
Collins Roth, managing director at MPC Industrial Projects, says the type of infrastructure investment within a portfolio is a “question of risk tolerance”.
He explains: “We believe global exposure, including emerging markets, is an interesting option for large investors seeking portfolio diversity. It’s a question of risk tolerance.
“More aggressive investors who are interested in global exposure, particularly emerging markets, might see infrastructure as a way to address risk in their global portfolio.”
Mr Argent adds: “As such, infrastructure may be viewed as part of a portfolio’s alternatives asset exposure – that is, the part of the portfolio designed to dampen overall portfolio volatility.”
Listed or unlisted
Diversification is not just in terms of allocating some money to infrastructure funds, but also relates to the type of underlying infrastructure – whether it is listed and more liquid, or unlisted; or whether the individual is seeking dividends or seeking growth within the portfolio.
It is also important to factor in the investor’s time horizon and the tolerance an investor has for risk or volatility.
Nick Langley, co-chief executive and co-chief investment officer for RARE Infrastructure, a Legg Mason affiliate, comments: “Typically we see investors with longer-term horizons put listed infrastructure into the alternatives part of the portfolio.
