For investors seeking growth, who may feel concerned about the current lofty valuations in both equity and bond markets, infrastructure offers diversification from such assets, for a start.
“Historically it has been a great diversifying asset class, being neither equities, fixed interest, property or cash,” says Guy Stephens, of Rowan Dartington Signature.
The benefits extend beyond mere diversification, however, with the stable, long-term nature of many infrastructure projects giving such assets defensive characteristics and significant appeal in their own right.
“The key attraction for growth investors is that these stocks typically have very predictable cash flows and have bond-like characteristics, making them good diversifiers for a portfolio that is looking for growth,” explains AJ Bell head of fund selection Ryan Hughes.
“This lower beta profile may mean they get left behind in a strongly rising market, but when times are more challenging the stable cash generation of these companies often comes into its own.”
Infrastructure holdings do tend to be categorised among ‘safer’ assets, which can suffer from lower volatility, as well as lower downside risk, than equities.
Mr Stephens describes the asset class as ‘not quite as low risk as fixed interest, but somewhere similar to property, possibly slightly lower as many of the assets or projects are backed by the government”.
Income generation
Infrastructure exposure has gradually become a more common element of investment portfolios, including those which seek to provide an income rather than just capital appreciation.
In this case it can meet different needs, driven by similar problems to those facing growth investors.
In the low interest rate environment that has persisted since the financial crash, strong levels of yield are difficult to find, particularly from expensive defensive assets.
This problem stems partly from the robust capital gains of recent years, which result in a lower yield, both in the case of dividends from stocks but also coupons from fixed income.
The difficulty here has reached extremes in the world of fixed income, with yields on government debt, but also corporate bonds, hitting new lows in recent years.
Research published by Bank of America Merrill Lynch earlier this year identified a ‘symbolic’ development where high yield bonds, which traditionally offer higher coupons for debt perceived to be riskier than the rest of the market, were paying out less than European equities did via dividends.
In contrast, infrastructure can currently offer much higher levels of income.
“Infrastructure has proved to be a popular sector for income-seeking investors over recent years and the sector has grown rapidly in size,” says Annabel Brodie-Smith, communications director at the AIC.
