SMSF investors must make sure the definition of infrastructure applied by fund managers they are considering engaging is proper in order for the portfolio allocation to achieve its coveted benefits, according to a specialist portfolio manager.
Magellan Asset Management portfolio manager Gerald Stack defined those coveted traits as being highly defensive, inflation linked and having a low correlation with other asset classes.
“If defined properly, infrastructure investments should give you reliable returns no matter what happens to the economy. So it doesn’t matter whether the economy is going really well or really poorly, infrastructure should continue to spit out very reliable returns over time,” Stack told the recent SMSF Trustee Empowerment Day 2016.
He added if done correctly, an allocation to infrastructure should generate an average return of 5 per cent plus inflation over a five-year time frame.
In regard to a definition, he said his investment house was looking at three specific critical components.
“Being an essential asset is the first plank of our definition. Essential assets are those that provide a service that’s essential for the efficient functioning of the community,” he said.
“Think about water or sewage. Everyone goes to the bathroom every day, at least they should, and in good times or bad times that doesn’t change. So you’ve got very reliable demand and that’s the first plank we’re looking for.”
He pointed out to ensure greater certainty of returns and cash flow, sectors where a monopolistic structure existed were the best to target.
Also important in achieving the aims of an investment in infrastructure was to know what asset characteristics to avoid, he advised.
“We try to screen out a few things. One is sovereign risk. So we won’t invest where we can’t be confident the government has got a legal regime that will allow us to get our money back. So China is out for us,” he said.
“Competition. If there is competition there, we won’t be there as a general rule. Competition is a wonderful thing for economies, a great thing for consumers, but a pretty ordinary thing for investors, particularly infrastructure investors.”
He identified commodity prices and asset sensitivity toward them as another element to avoid if investing in infrastructure.
