The range of so-called ‘alternative’ asset classes is wide, from funds using diverse strategies outside of the more traditional approaches along style, size, or geographical lines, to investing in art or wine, or using private equity and hedge funds.
Another is infrastructure, a sector given a boost in recent weeks thanks to the Chancellor announcing in the 2021 Budget the setting up of the UK Infrastructure Bank. However, UK investment in this sector is far larger than the £12 billion of capital allocated to the Bank, with the UK planning almost 700 projects totalling £400 billion over the next 10 years.
Investing in infrastructure means looking at sectors and companies outside of some of the typical areas of financials, consumer products, and industrials that are often found in our clients’ equity income funds. They are popular for a reason in that the companies are typically mature, well-established businesses with sufficiently robust balance sheets to pay a steady and growing dividend to keep investors happy.
But as 2020 has shown, some long-standing businesses can find themselves under pressure in the face of challenging events which can put paying those long-term dividends in jeopardy. Depending on the sector the companies operate in, this could be just for the short-term, but if the sector is becoming less favourable because of structural rather than cyclical reasons, it may be for the long-term. Moreover, for all their size and market power, many of these companies are unlikely to have a high degree of certainty in their ultra-long term revenue streams.
Certainty should be a welcome addition to any portfolio, and while investing in long-established and familiar names can offer some comfort for potential future returns, infrastructure can offer income underpinned by revenue that is government backed or subsidised and fixed over many years, often linked to inflation. Companies in these sectors are often providing essential services and operate ‘real’ assets (hospitals, bridges, energy generation) in markets with high barriers to entry, offering stability in demand and therefore revenue.
These longer time horizons can help to dampen price volatility of infrastructure funds and the typically lower degree of correlation with other asset classes can offer diversification benefits. However, investing in this sector is not without risk, many infrastructure funds invest in equities and therefore remain sensitive to general equity market risk, particularly during periods of market stress.
The sector is also sensitive to factors such as changes in regulation which can depend on which way the political wind is blowing at the time. Often though, given the multi-decade periods for some of these types of projects, regulation is unlikely to change too frequently, particularly when those projects are focused on the general betterment of society such as climate change.
The current investment environment means ESG is of course a focus, and approaches range from the now almost standard approach of integrating these factors into the decision-making process to others where the aim is to have a more demonstrable impact against stated goals.
As countries emerge from the pandemic, governments are pledging to ‘build back better’ by investing in the infrastructure which will drive economic growth and to do so in a world that is getting cleaner and greener. This investment will be directed across a range of areas and will hopefully see increased opportunities for investors to deploy their capital in ways that are both aligned with their goals while also adding the benefit of bringing alternative themes into their portfolio.
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