It's a good time to consider investment in the infrastructure sector for three clear reasons.
Infrastructure is an inflation hedge
Infrastructure is essential for communities and society to function. Assets include electricity and gas grids, roads and rail, telecommunications towers.
Some of these assets are highly regulated to ensure fair prices to users. Regulators are keen to encourage efficient management and reduce unnecessary volatility. They want to avoid out-of-control mid-winter energy price hikes for example. In practice, the profits of companies that own and operate infrastructure assets are usually more stable over time. This is true even in a high inflation or recessionary environment. Even with regulations, these companies have contracts that allow them to pass on higher costs or increase prices based on inflation.
Demand is highly predictable
While many investment classes carry a high degree of risk, infrastructure demand and supply is highly predictable. Energy providers, roading companies and the like are working to regional plans and population projections that extend beyond a decade out. They have a longer-range view than most businesses.
Responsible local thinking
We can invest in and support companies that are leading the transition away from carbon. Energy utilities such as Evergy and Xcel Energy have achieved emission reductions of around 50% since 2005 and have set targets to be net zero or carbon free by 2045-2050. Fund managers actively request better environmental disclosure procedures and encourage the utilities to adopt clean energy transition strategies.
Our portfolios include exposure to the infrastructure sector via the Magellan Infrastructure Fund as well as the Macquarie Global Listed Infrastructure Fund. They provide added diversification, and an income stream thanks to the relatively stable earnings derived from the infrastructure companies. They tend to deliver to investors a higher dividend yield than most asset classes.