Wednesday, 16 September 2015

Infrastructure has been attracting greater attention in the global investment community and the media as governments around the world increasingly look to the private sector to fund new infrastructure investments. So why do we see infrastructure as an important asset class to include in a diversified, multi-asset class portfolio?

What is infrastructure?

Infrastructure assets are the utilities and facilities that provide essential services to communities, and usually meet some form of economic need such as transportation networks (e.g. toll roads, airports, ports, tunnels, rail), water and energy distribution systems, health and education facilities. Typically, an infrastructure asset displays a monopolistic position or barrier to entry that makes it the primary provider of the essential service.

QSuper’s exposure to infrastructure assets

QSuper has $4.6 billion invested in infrastructure assets globally which form part of each of our Ready Made multi-asset class options (Balanced, Aggressive, Moderate and Lifetime). Our Balanced option, which is the default option for Income account members, currently has an allocation of 12 per cent of the portfolio invested in infrastructure assets. This is one of the largest alternative asset class allocations and reflects the value of these assets to the portfolio.

The key attraction to investing in infrastructure lies in the expectation of high distributions of income which can often be closely linked to inflation. In addition, the high barriers to entry and the monopoly-like characteristics of typical infrastructure assets mean that their cash flows should not be as sensitive to the economic cycle as many other asset classes. As such, we aim to acquire a reasonably diversified pool of infrastructure assets primarily focused on delivering:

  • long-term stable cash flows based on low sensitivity to broad economic activity that offer genuine diversity to listed equity markets
  • a strong long-term linkage to Australian CPI inflation to protect from the damaging impact of inflation.

While we have a material existing exposure to infrastructure, the expected growth rate of the Fund and the desirable return characteristics lead to an ongoing appetite for new infrastructure investment. We utilise the expertise of high quality external infrastructure managers in order to increase access to the best global opportunities.

However global demand for high-quality, defensive infrastructure has been very strong, resulting in higher bids for projects and pushing the prices of infrastructure assets up around the world. QSuper members have been beneficiaries of this development through strong price appreciation and therefore strong returns on the existing assets held in the portfolio. But this has meant that acquiring additional assets at levels that are likely to generate attractive returns going forward has become more difficult.

In this environment, access to quality deal flow and a disciplined investment process are of paramount importance. QSuper and our external managers will maintain a disciplined approach to investment to ensure our members are investing at price levels that are expected to generate forward returns commensurate with the risk of investing.

What does our infrastructure portfolio look like?

Our members have exposure to a diversified portfolio of infrastructure assets with investments around the world and across various industry/sectors. The charts below show the QSuper infrastructure portfolio exposures by geography and industry.

Infrastructure portfolio exposures by geography

Infrastructure exposure by geography


Infrastructure portfolio exposures by industry

Infrastructure exposure by industry

Currently, the portfolio is skewed towards Australian assets with high levels of stable income. This is because we acknowledge that Australian infrastructure assets represent a strong match to our objectives, relative to other global assets given their direct linkage to Australian inflation. To learn more about some of the infrastructure investments that QSuper has exposure to, please follow the links below:

 

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.

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