annabel-tonry-jp-morgan

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.

This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

Start typing and press Enter to search