“It is possible to invest in infrastructure through direct shares or a managed fund, giving investors access to the advantages that this asset class offers, including a very attractive risk return profile with strong growth upside.
“In fact, investing in listed infrastructure may be a better option for retail investors than an unlisted direct exposure.
“Investing in listed infrastructure gives access to the same underlying asset profile as an indirect or unlisted exposure, while the main differences are in how an investor owns that asset profile, or how they gain exposure to the fundamental assets,” she says.
Similarities
Both listed and unlisted infrastructure investments offer exposure to the same type of fundamental assets ? if not the same actual assets ? exhibiting all the valued defensive characteristics of the infrastructure asset class.
“Furthermore, both listed and unlisted investing employ the same valuation techniques, and there is regular movement of assets between the listed and unlisted space,” Sarah says.
Differences
The main differences between investing in listed and unlisted infrastructure options are largely to do with how investors gain exposure to the fundamental assets.
Investors in listed investments, rather than unlisted, generally benefit from:
- Greater diversity: If an investor is gaining exposure through a fund of listed equities, they will be gaining exposure to a 25+ stock portfolio with diversity across sectors and demographics. Even within an individual listed name, an investor can find diversified exposure as a listed company tends to own a number of assets, even across infrastructure sub-sectors. An unlisted exposure, however, often has much higher concentration risk because it is generally investing in a single asset or, if in an unlisted fund, it will generally have a smaller portfolio of assets.
- Greater liquidity: The listed sector has a shorter time to invest/divest, which can be useful. For example, if investing in emerging markets, investors may want to get out quickly if something turns (such as a change in political leadership).
- Less acquisition risk: Direct investment needs intense due diligence, requiring a much larger team, and ultimately leads to greater portfolio concentration risk and limits the investor type.
- Greater in-cycle volatility: As listed assets are re-priced daily, there is higher in-cycle volatility. This, however, is not necessarily bad as there can be an opportunity for an active manager/investor to add alpha by taking advantage of market volatility.
Sarah says active management in a benchmark agnostic fashion is particularly important when investing in infrastructure.
“Active management of any infrastructure exposure is key in order to allow investors to gain exposure to the underlying demand/growth story.
“In addition, as infrastructure offers two macro diverse sub-sectors (utilities and user pay assets), an infrastructure portfolio can be positioned for all points of a macro cycle if properly actively managed.
“Utilities meet basic needs and are largely immune to macro cycles, making them an attractive defensive, resilient asset class in depressed markets.
“By contrast, User Pay assets (toll roads, airports, ports and rail) are positively correlated to macro growth and represent a very attractive investment proposition in buoyant macro environments.
“Active management of these two infrastructure sub-sectors aims to smooth the volatility of the investment, again comparing favourably to a general index or ETF (that generally favours cyclicals) or direct shareholdings which have concentration risk.
“Being benchmark agnostic is another important consideration even within the infrastructure space. This supports true active management and will see investment in the best opportunities globally, regardless of any benchmark weightings.”