Property & Infrastructure Funds Infrastructure as an Asset Class

Thought it time to start another exciting (not) topic. Infrastructure, usually unlisted, is of course popular as a core holding of a number of Industry Super and Global Pension Funds etc for it’s inflation protected (not all agree) cash flows. It often gets said that Infrastructure as an asset class is where REITs were a couple of decades ago.

I don’t own any Infrastructure Funds and I’m certainly not suggesting now is the time to buy given the hunt for yield in recent years and Rising interest rate environment particularly in the US.

Probably one major question is whether adding Infrastructure to the portfolio offers much in the way of value if one already holds REITs?

This paper from Macquarie provides an interesting comparison of REITs vs Infrastructure vs Utilities:
https://www.macquarie.com.au/dafile...s/2016-01/ListedREITInfraUtilities250116e.pdf

Here’s a couple of tables I found (will see if I can find better ones) showing correlation over different time periods:

https://www.credit-suisse.com/pwp/a.../infrastructure_ch_uk_lux_ita_scandinavia.pdf



https://www.vaneck.com.au/investing-in-global-infrastructure/

Boring I know but any comments welcome.

 

Correlation tables are so historically time dependant they tell you very little about the future, except, that something has the “potential” to be uncorrelated at times which is easy to establish from a basic understanding of the fundamentals anyway.

Everything financial seems to be correlated when **** hits the fan so risk reduction and volatility smoothing in tough times is questionable and should not be the reason for holding Reit’s or Infrastructure.

However, in more benign times differing correlations may occur.

If by adding something to your asset allocation for which you don’t have to give up too much in expected long term returns to achieve a potential correlation differences you may (or may not) achieve a portfolio effect improvement to long run risk adjusted returns without damaging the absolute return. Costs (tax and management etc) obviously need to be smaller than the benefit to get a net improvement.

For me Reits and Infrastructure play the same role in a portfolio – potentially different correlation without having to give up too much in the way of expected long term returns. I have recently decided that an allocation to a factor can also achieve the same objective and as I’m still early days (limited capital gains implications) in my passive strategy I have changed my asset allocation framework to drop REIT’s and include a fixed allocation to the value factor.

 

Thanks @dunno. Your observations are not all that different to what I’ve concluded.

Correlations seem to work ok until when they’re most needed.

Small value in particular provides similar correlation benefits to REITs but with a likelihood of higher “real” returns. They’re also more tax effective.

In our case I’ve decided paying a higher fee for correlation benefit and adding complexity by including REITs / Infrastructure Funds is not worth it. Besides given we can comfortably live off way less than the natural yield of the portfolio the whole correlation thing in an attempt to smooth capital volatility is irrelevant and a distraction.

As intellectually stimulating as the research was the decision remains to keep the portfolio simple (most important) and low cost without trying to tilt to certain sectors.

 

Raining today so was just skimming this article (by Vanguard) in AFR discussing investing in Infrastructure for Insto and individuals. Wonder if such articles by Vanguard are to raise awareness in preparation for the release of an ETF class of their Wholesale Global Infrastructure Fund? Or merely to promote factor ETFs / Funds (eg minimal volatility) for similar purpose mentioned later in the article?

How individual investors can get hold of infrastructure stocks

And a recent paper released by Vanguard on 17 Sept 18:

The role of infrastructure in a portfolio

 

I noticed on six park that they group infrastructure into the low risk low return defensive group of asset classes with bonds, yet REIT's they put above international and Australian equities in the high risk high return growth assets.
Would others who know a bit more about it agree with this assessment?

 

There’s no way I would class it in the same category as truely defensive assets such as Gov’t bonds. Others might disagree but it belongs in the risk category albeit potentially down the risk curve.

Infrastructure is already in the main cap weighted indexes and fees are cheap. Overweighting with a sector fund may provide some benefits but will cost a higher fee. I’m content with market weight.

@The Falcon and @dunno are much more knowlegible in this area than me.

 

Makes about as much sense as HostPlus designating their direct property and credit exposures as 'defensive' .. which is not at all.

At the end of the day, yes, it may have lower historical price volatility compared to market weight equity benchmarks... but it's still equity! I find it difficult for anyone to argue that any equity exposure is low risk/defensive purely because of historically lower price volatility. Quite a lot of this infrastructure equity is invested in assets that have various risk exposures (airports, train rolling stock, mobilr internet towers, toll roads). This stuff all faces economic and tech risks not too dissimilar to that covered by general market exposure. The pool of listed infra is certainly not just water pipes etc.

 

Come on mate, it's Australia. Property is the most defensive asset there is

 

Truth is, I'm very much a real tinkerer with my own investing. I can never be a 2 or 3 fund guy. I have to feel like i'm doing something proactively. I actually run two separate portfolios. One for myself and one for my partner. The one for myself is mostly cap weighted exposure. With a little non cap in Aus Equities via LIC. International is market cap but sliced into unhedged/hedged and an allocation to EM. I have an Aus Bond allocation passive. And an active managed global bond fund (can't stomach putting money into passive global bond funds... seriously why anyone would want to blindly tip $$ into Japan and Italian gov debt just because they are large issuers is beyond me). But I guess the point for this thread is .. i do not allocate beyond market weight to individual sectors like REIT or Infrastructure..

Any potential benefit from reduced price volatility and higher compounded returns from reducing volatility is lost on me... because I've proven myself to be comfortable and act rationally with market weight volatility. And any benefit in respect of reduced volatility producing higher compounded returns is negligble.. absolutely negligible compared to my saving/contribution rate.. and capacity to inject further capital to the risk portion during the not so great times.

My partners portfolio.... price volatility means a LOT to her. And for her.. the price for having active tilts and exposures is worth it to smooth the ride. So we've split it and spliced it and have overweighted Infrastructure and overweighted REITS beyond market cap weight ... even gotten really excited and got some hedge fund exposure!

So I do think, for people who still want growth exposure, but want to limit volatility a little. Having an overweight allocation to infrastructure "may" help. But to be honest, like REIT allocations I think the bigger benefit is the difference in the return distributions (REITS and Infra generally have higher income distributions compared to market cap).

 

Political / Gov’t intervention is also another risk not to be taken lightly.

 

Is there perhaps a yield trap in this though? That is higher initial yield but lower distribution growth over time compared to equity dividends in general.

 

I think, and don't quote me on this one (although I'm pretty sure its very close to the mark) that these get grouped in defensive given the return stream has very low volatility.

The reason why these streams have very low volatility is that asset values for direct property and direct infrastructure are valued as a best guess over time and typically show a lower volatility than if the asset was available for sale everyday.

As an example, the listed infrastructure space (think listed airports, ports, toll roads) despite being relatively low beta, is far more volatile than the "direct" version of these assets which show laughably little volatility*. Something to consider.

*Also a big problem with private equity

 

The other thing to consider with these assets is that natural owners (pension funds/SWF/superannuation funds) have extremely low cost of capital and stated long horizons - the prices that they can pay for these assets is very high and is probably a tailwind for the sector over the next 5-20 years.

There was an interesting article from Brookfield AM in the AFR about it yesterday I believe (but I can't find it now).

 

@OscarBravo do you have a view on infrastructure as an investment in one’s personal / SMSF portfolio? I know you’re a dividend focused investor but for example infrastructure distributions vs equity dividends, yield trap, inflation protection etc?

 

I've never understood this as PT's reason for why he says REITs are garbage. nothing stopping you from just re-investing it back in to grow the asset base yourself?

 

Here’s PT’s comparison of Industrials vs AReits but more recent charts I’ve created don’t look as miserable. As usual starting dates will have a big impact. Tax needs to be considered also.

 

Looking at infrastructure in 'isolation' I can't see any reason to go above capitalisation weight.

IF you run a 'static' asset allocation portfolio, overweighting infrastructure 'may' have some merit. Potential balancing benefits but still a decent expected long term return.

If you are going to go international to get diversification in your infrastructure , probably best to hedge from a portfolio balancing perspective.

My 2c.

 

Too lazy to get up and boot the PC but here’s a total return chart I created awhile back which still goes back a decent way but not as far as PT’s chart. I’ve no problem holding index market weight of AReits around 8% but have no desire to overweight them.

 

Thanks @dunno. Fully agree.

So much of the literature I’ve seen on infrastructure (and certain other asset classes) is always banging on about correlations. But with listed assets I’m never comfortable with the reliability of this over time and of course it all tends to turn to crap when markets tank. Besides I’ve come to the conclusion I’m too stupid to have a view so settle for market cap weighting of these sectors (are they really a separate asset class?).

Then of course there’s a price to pay for a separate Infrastructure Fund including hedging. Eg market cap Infrastructure 0.18% in VGS (0.21% in Hedged VGAD) vs approx 0.50% for dedicated Infrastructure fund.

Interest rate sensitivity and high debt are perhaps other issues.

Yield is of course the other benefit mentioned at times so perhaps an income focused retiree might be more interested?

Maybe @The Falcon might find time to chime in. He’s researched this area well.

 

Why hedge infrastructure specifically as opposed to part of your equities?