Finance Your Super Should you invest in infrastructure? What to consider

Should you invest in infrastructure? What to consider

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Many Australians already indirectly own a share of an airport, an electricity generator or a water supplier, they just don’t know it.

The chances are that part of your superannuation fund, depending on your investment option, is invested in infrastructure of some sort.

There’s a good reason why long-term investors, like superannuation funds, seek out investments in major unlisted Australian infrastructure assets. The nature of these large, essential and tangible assets means that a carefully constructed portfolio can provide strong capital growth, less volatility than some other assets, regular income and relative certainty of future operation.

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So should infrastructure assets be part of your investment portfolio? Before deciding, you should first consider your risk profile.

Your risk profile is dependent on many factors – your age, financial goals, earning capacity, current career phase and tolerance for risk. Your risk profile will largely determine your investment choices.

Airport lounge
You might already own an airport lounge … or two.

Your risk profile

Your risk profile is dependent on many factors – your age, financial goals, earning capacity, current career phase and tolerance for risk. Your risk profile will largely determine your investment choices.

Learning about your own personal risk profile, and even undertaking a formal process with a financial adviser, is one of the most useful exercises you can undertake as an investor. There are many different models of risk analysis, however the system we use ranks each investor with a risk profile of between one and six.

Risk profile one investors are risk averse investors. Their investments are entirely ‘defensive’ – protecting the capital they have built while aiming for conservative growth – and their portfolio is comprised entirely of cash or fixed interest investments. In a sense, they are content with lower but more certain returns.

Risk profile six investors are ‘aggressive’ investors, whose investments goals are to achieve maximum growth from their available capital. To realise this growth, they need to consider investing a large proportion of their portfolio in higher-growth, but potentially more volatile, assets such as Australian and international shares, and property.

Many investors sit in the middle of these two extreme risk profiles, and hold a balanced portfolio of investments. They use a mix of growth and defensive assets to achieve some growth, but without exposing themselves to the maximum volatility of the market. Long-term investors who can accept the risks of investing in a relatively illiquid asset class may wish to consider investing in infrastructure.

What is ‘infrastructure’?

By definition, infrastructure relates to the essential facilities and services upon which our everyday lives depend. This means these assets can have the ability to provide long-term exposure to economic growth and relatively stable, inflation- protected cash flows.

While other assets, like equities, are subject to sharemarket fluctuations, investments in unlisted infrastructure has been found to be less volatile. As a result, these assets can allow investors to diversify their portfolio and hence reduce their risk.

We’ve found that exposure to infrastructure can help investors achieve better risk/return outcomes over the long-term. Infrastructure allows investors to diversify their investments from the familiar investment asset quintet of cash, fixed interest, Australian shares, international shares and property.

It may also allow them to achieve greater growth and reduced volatility. Adding infrastructure into an investment portfolio adds another string to the investor’s bow.

Accessing infrastructure investments

Infrastructure assets are large-scale and capital-intensive and opportunities for retail investors to invest in infrastructure outside of super are rare.

By understanding your investment risk profile and the types of assets available to you, you improve your ability to build a successful investment portfolio that can help you meet your future financial goals.

The facts and opinions above are those of the author in his capacity as a representative of Industry Fund Services Limited and do not constitute financial advice. Seek independent financial advice before making investment decisions.