There are two main ways to access infrastructure assets. The first method is to invest through listed infrastructure companies in equity sectors such as utilities and energy. Alternatively, you can invest through listed securities representing private infrastructure vehicles. I prefer to invest in infrastructure through listed investment companies that are accessing the asset class through opportunities such as public private partnerships. This is a specialised asset class and we rely on the in-depth expertise of those third parties, which have a solid track record of investing in infrastructure.
Of course, detailed due diligence is important to identify the most appropriate investment vehicles. I have a preference for developed market infrastructure projects rather than those exposed to the emerging markets. I also favour infrastructure projects that are already operational – rather than in the planning stage – and those backed by government, with long-term contracts structured on payment by availability of the asset. I feel this reduces risk within this asset class and provides more certainty around the stability of the income stream over the longer term. Of course, no investment is without its risks. One of the key risks with infrastructure is political and regulatory – changes in government policies that negatively impact returns of future projects. This is one of the reasons why I prefer projects that are already operational.
Loans
One asset class that is often overlooked by those seeking income is loans – in particular, bank loans. Bank loans, also known as floating-rate secured loans or leveraged loans, are loans made by banks to non-investment-grade companies to finance the likes of mergers and acquisitions, leveraged buyouts, recapitalisations, capital expenditures and general corporate purposes. The loans pay a floating rate – earning a base rate (typically Libor) plus a spread – which means that if interest rates do rise, the income from these bonds will rise in tandem. Banks loans are secured and hold the most senior position in a company’s capital structure. They hold a first priority lien on the assets of the borrower, including receivables, inventory, property, plant and equipment. In other words, they must be repaid before other debt obligations, and before bondholders or stockholders.
While loans have a similar risk/return profile to high-yield bonds, the asset class can be lowly correlated to high yield and therefore provides attractive diversification benefits. I prefer those structures that give exposure to high-quality loans within a well-diversified portfolio, with the underlying individual loans selected by an experienced team of experts.
Though the merits of investing in alternative assets for income are plain to see, they should not be treated as standalone replacements for income-yielding assets. Instead, they are more effective when combined in an overall income portfolio. It is also important to have a robust and detailed research process when selecting alternative income assets, making sure you fully understand the risks you are taking when investing in these asset classes.
