Annabel Tonry, Executive Director, J.P. Morgan Asset Management
Private infrastructure has become foundational over the last decade to many institutional portfolios, particularly defined benefit (DB) plans. DB schemes have been attracted to the financial and non-financial benefits that can be achieved through market cycles. Schemes with long-term horizons and sources of illiquidity have been able to benefit from a steady income, downside protection and inflation protection. Their defined contribution (DC) cousins, however, have until now been less able to benefit, but with a focus from the government on accessing illiquid asset classes, could that be about to change?
When we talk about core infrastructure assets we are referring to essential facilities and services upon which economic productivity depends, typically comprising long-term capital assets or concessions to operate such assets.
Core/core-plus infrastructure assets may include:
- Regulated assets: electricity transmission and distribution facilities, pipelines, water distribution and waste collection
- Contracted Energy Assets: renewable and conventional generation
- Transportation assets: assets required for the movement of goods and people such as toll roads, bridges, tunnels, airports and sea ports
- Communication assets: broadcast and wireless towers, cable and satellite networks
- Social assets: healthcare facilities, schools, public and military housing
These core assets often have monopolistic characteristics, with high barriers to entry and sustainable competitive advantages. They are typically long-lived with a limited risk of becoming redundant or obsolete in terms of technology, and they are relatively immune to changes in demand.
As a result, many core infrastructure assets can generate relatively steady and predictable returns, the majority of which come from cash distributions that grow over time. Such returns are often correlated to inflation via regulated return, concession or contract frameworks, and in many circumstances, provide a good match for long-term savers, such as DC members.
A diversified private infrastructure portfolio of assets with “core” characteristics has the potential to provide DC members with several attractive benefits, including:
- Diversification – Due to the low correlation of returns to traditional asset classes, such as equities and bonds
- Inflation protection – Via regulated frameworks or contracts
- Lower volatility returns – Due to the essential nature of assets and relatively inelastic demand
- Access to investments where sustainability is central to success
- Exposure to tangible assets that bring DC savings to life
Generally speaking, the performance of the asset class during the Global Financial Crisis, and in the Covid crisis to-date, is illustrative of these potential benefits.
Pension plans across the board are being asked increasingly to focus on sustainability and DC plans are no exception. While infrastructure investment has provided clear financial benefits to portfolios, the ESG values and practices that are central to these assets have translated into significant social and environmental benefits for investors. Equally, the tangible nature of infrastructure assets could allow DC members to feel a sense of engagement and stewardship when it comes to this asset class and their savings.
Integrating ESG issues into the day-today management of infrastructure businesses is critical to fulfill and maintain the social license to operate. Successful infrastructure investing requires careful thought about a company’s carbon footprint, use of water, approach to diversity, equity and inclusion, and the importance of a culture focused on health and safety. Ultimately, we believe investing in these assets can help improve the sustainability of communities and their environments. DB schemes have long enjoyed the option to invest this way – maybe it’s time for DC schemes to benefit too?
For Professional Clients/ Qualified Investors only – not for Retail use or distribution.