Chronic underspending in infrastructure and consistent population growth has resulted in a dire need for investment portfolios to fund the provision of essential services to communities.
Speaking at a Bennelong adviser event in Sydney last week, 4D Infrastructure chief investment officer Sarah Shaw said investors looking for opportunities that will deliver across all market cycles should consider diversifying portfolios with infrastructure assets.
"In falling markets, infrastructure provides a safe haven for investors who can tilt their portfolio towards safe markets and regulated utilities. In this environment, infrastructure provides investors with a defensive asset class with stable, with generally more predictable and resilient earnings, as well as a low correlation to general equities," Shaw said.
"In rising markets, 'user pays' assets come into their own. Such assets are usually correlated to GDP growth and are protected from rising interest rates, giving investors an inflation hedge."
Shaw said recent history demonstrated that even though infrastructure underperforms the broader market when bond yields rise, it quickly recovers as 'user pays' assets tend to outperform as a result of being geared for growth and macro recovery.
"Similarly, as bond yields start declining, investors look for defensive havens and infrastructure assets outperform. Regulated assets gain favour as investors move to protected earnings. We have seen this happen over the last market cycle, where infrastructure outperformed the broader market both as the Federal Reserve cut the cash rate and also when it was raised," Shaw said.
She said this growing market holds almost unprecedented opportunities for investors, with global estimates showing between US$60-70 trillion will need to be spent on the world's infrastructure in the next 15 years.
"It is worth noting that since listed infrastructure has been recognised as its own asset class it has offered investors significantly better returns than general global equities since 2003 - periods of both boom and bust, including a debt-driven GFC," Shaw highlighted.
"For the foreseeable future we are looking at strong long-term tailwinds - coupled with almost infinite capacity - and topped off with attractive defensive returns, regardless of share market cycles," Shaw said.