My name is David Holder, Senior Analyst at Morningstar. I'm here today to talk with Nick
Britton, Head of Intermediary Communications at The Association of Investment Companies.
Hello, Nick.
Hi, David.
Nick, we're here to talk about infrastructure. So, could you quickly or briefly explain about
what infrastructure means within an investment context?
Well, infrastructure is a very broad asset class. It encompasses everything from the
pipes in the ground like a gas transmission network or water network to airports, to social
infrastructure such as hospitals, medical centers, libraries. But basically the easiest
way to think about it is everything we really rely as an economy and as a society for our
daily lives.
So, an extremely broad set of investment potential. We often hear about the pilot state of U.K.
infrastructure. How much more do we have to spend or invest on infrastructure and where
are those funds going to come from?
So, the Infrastructure and Projects Authority actually estimates we need to spend GBP600
billion on U.K. infrastructure over the next 10 years. And of that they are expecting about
half to come from the private sector. So, that obviously raises quite lot of questions
about exactly how we're going to fund it, what mechanisms are going to be used to allow
private investors to access this asset class in a way that's both good value for money
for the tax payer but also attractive for investors, and that's the real challenge,
I think for the next few years.
Okay. And what are the benefits, do you see the characteristics – the investment characteristics
of infrastructure?
Sure. Well, infrastructure has low correlation with other asset classes, although it depends
a little bit on how you access it. But that certainly can be one of the benefits, low
correlations, predictable revenue streams, cash flows which can convert into predictable
dividends for investors, attractive levels of income compared to equities and bonds in
an environment where obviously yields are being squeezed on conventional asset classes.
So, it's got several attractions really for investors. But the important thing is that
you don't necessarily access all of those benefits by investing in anything that's got
the word infrastructure in the name of the products.
Sounds very promising for investors, but of course there is always risk with investment.
So, what would you highlight in terms of the risk that investors should be aware of when
considering an infrastructure investment?
So, because this is an asset class that is really built on predictable revenue streams,
what you've really got to ask is what are the risks of those revenue streams becoming
not quite so predictable. And so, you have elements of political risk. If you are looking
at infrastructure which is, for example, contracts with the government or underpinned by regulation,
what is the risk of political changes or regulatory changes that are going to adversely impact
that investment.
Then at the other end of the scale, where you've got infrastructure, which is more exposed
to the market or more exposed to demand, then obviously you've got to look at what factors
could influence demand for the asset or you know in the case of market based infrastructure
investing competition and the normal market forces we think about. So, it really depends
on what kind of infrastructure you are investing in and how you're accessing that asset.
Okay. So, those – the nature of the infrastructure investment at the sort of micro level, but
for investors, how are they – what are the options available to them?
So, you basically got two options, you've got open-ended infrastructure funds and also
ETFs which invests in quoted companies across the world with an infrastructure flavor. So,
these will be trading businesses that might be utilities, for example, or companies that
construct and operate and maintain infrastructure.
You've then got the closed-ended side, you've got – because of the closed-ended nature
of an investment company, infrastructure investment companies that can access a much broader range
of assets and contracts, so they could invest directly into an infrastructure project, for
example, the contract to build and maintain a road for a 30-year period or something like
that. And they can access more directly those predictable revenue stream that I'm talking
about. So, you can do it in either way, but you have to be aware of the different risks
there and the different return profile you are likely to get.
And with regard specifically to closed-ended investment, you know these trusts do not tend
to trade around NAV, so they can move quite aggressively at a premium to a discount. So,
that's an additional risk also that investors should generally be aware of.
That's absolutely right and you know these things are investing in unquoted assets and
the valuation of an unquoted asset would always be an educated guess. And so, when you have
these big premiums or big discounts, that's in effect the market saying, we don't really
agree with the valuation that's in the latest annual report. And so, although the discounts
and premiums move around quite a lot, it's really the income stream from these infrastructure
investment companies that is key to keep an eye on, and they should of course be considered
long-term investments because of the potential for share price volatility.
Absolutely. Thank you, very much. Very interesting.
Thank you.
My name is David Holder. Thank you for watching. Good bye.