Within economies the world over, from developed market behemoths to frontier minnows, infrastructure is a pivotal, yet often unsung, lynchpin of economic prosperity. Whether it be transportation, telecommunications, energy grids or water supply, the various guises of infrastructure impact upon the daily lives of all economic agents, from individual consumers and small companies to multinational conglomerates and governments. Given this economic significance, infrastructure has stood as a distinct asset class within our higher risk portfolios since 2008, as we believe the qualities that the sector possesses, and the potential growth it offers in future, justifies an allocation within any multi-asset portfolio of at least moderate risk.
While the macroeconomic importance of sound infrastructure, accompanied by the unrelenting need to continually improve and upgrade it, generates obvious investment appeal, it is by no means the only reason to invest, in our view. Companies that are either at the sharp end of infrastructure projects, or those that provide background services and support to those that are, tend to be less cyclical, meaning their revenue streams and overall cash flows are less dependent on business cycle fluctuations than, say, technology companies, a highly desirable characteristic during times of market turbulence and distress.
Overall profitability of infrastructure companies also tends to be protected against inflation, as the ability to raise prices in line with, or even in excess of, the prevailing inflation rate insulates their revenue streams and preserves margins, with the price inelastic nature of the services that they provide ensuring minimal waning of demand is observed as a result. Furthermore, the robust balance sheets and defensive business models that are indicative of the sector’s constituent companies often lead to healthy dividend payments that tend to be preserved, if not built upon, yearly, while from a portfolio context, infrastructure can add real value within the alternatives weighting as the lower correlation it enjoys relative to many other asset classes aids diversification by broadening the source of potential returns, an especially rewarding trait on occasions when traditional asset class correlations converge.
Looking ahead, we believe the outlook for the asset class to be a favourable one, as the chronic under investment in infrastructure in many countries is almost certain to generate an abundance of opportunities over a medium to long term time horizon. In no place is this infrastructure neglect more pronounced than in emerging regions, with a corollary being that inadequate infrastructure is now beginning to inhibit further growth and development, and hence, governments are being forced to invest to promote healthy, sustainable growth for the longer term. In fact, the World Bank has estimated that for each year between now and 2015, $850 billion needs to be allocated for infrastructure improvement in the emerging regions, such is the scale of the enhancements needed.
Within our portfolios which have infrastructure exposure, we tap directly into this emerging market thirst for infrastructure spending via a fund that specifically targets emerging markets. Some 25% of its net assets are located in Brazil, a country of particular infrastructure prominence given its need to install much improved transport and telecommunications networks in time for the next World Cup and Olympic Games, while a further 16% is dedicated to China, the second largest economy in the world. Complementing this region specific play is a globally orientated infrastructure fund, which pinpoints attractive infrastructure potential in economies the world over, both developed and developing, although a bias is given to the North American and European regions.
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