The infrastructure sector is seen, with good reason, as a solid alternative asset class with which to diversify an investment portfolio.
Investors have been attracted by its reputation as a sector which is largely uncorrelated to movements in wider equity and bond markets, as well as the appeal of supporting vital projects needed by society.
However, not all infrastructure investments are created equal. During periods of significant uncertainty, in which global demand growth is likely to be impacted, it is critical to understand how an infrastructure asset generates income.
Infrastructure assets where the income is linked to the asset's availability for use (regardless of the level or nature of such use at any time) are the most defensive.
These investments should be well insulated from any changes to the level of demand for the services the infrastructure provides.
Certain projects procured under public private partnerships, such as the private finance initiative or the regulated asset base model, benefit from these characteristics. Revenues are typically public-sector backed and inflation linked.
Conversely, where revenues are linked to the level of demand for the services provided by an infrastructure asset, the short-term impacts of events such as the lockdown in response to Covid-19, and the medium-term reductions in GDP growth likely to result, have a more direct impact on income.
Investments in airports, ports, and toll-roads are examples of assets likely to be significantly impacted by demand reductions resulting from Covid-19.
Covid-19 has seen unprecedented actions taken by governments to restrict the movement of people.
To a varying degree all infrastructure relies on the availability of people and spare parts to operate and maintain physical assets.
In a world of sustained restrictions on such movements, the performance of all infrastructure investments will ultimately be impacted.
Regardless of these characteristics, all infrastructure projects should be viewed as long-term investments that are likely to be exposed to a number of market cycles over their lives.
The fundamentals of the provision of critical physical assets, high upfront capital costs resulting in an attractive ongoing yield and long asset lives all remain valid through periods of significant uncertainty.
Phil Kent is a director at Gravis Partners
• Infrastructure is an attractive diversifier away from traditional fixed income
• Some areas are highly defensive in volatile times
• Recession could hit areas dependent on demand-based growth
• Some assets could be affected by disrupted supply chains