Road to riches brings real rewards
Some infrastructure investments can be accessed via sharemarket-listed vehicles but the history of these holding toll roads in Australia is patchy. Most recently there was the failure of BrisConnections, Brisbane's airport link tunnel, with the operator going into receivership with $3 billion in debts.
But while infrastructure investment has been tainted by some flops among Australian toll roads, the 5 million members of industry super funds have done very well from the asset class.
These fund members own the fourth-largest water supply and sewerage company in England and Wales, a company that heats the homes of 4 million Poles, and airports overseas and in Australia. Such assets have helped give industry superannuation funds a long-term performance edge over retail funds. Such businesses seem diverse, but they have common characteristics.
They are usually essential services in which price increases do not reduce demand; often government-regulated to provide a service at an approved price; and tend to have high barriers to competition, such as regulations preventing a competing asset from being built close by.
Industry Funds Management, owned by 30 industry funds, is among the world's biggest owners of infrastructure assets. A few weeks ago it took a 35.5 per cent stake in the airport operator that owns Manchester Airport and London's Stansted Airport, as well as some smaller British airports.
Opportunities are emerging in Europe to buy good assets. Industry Funds Management global head of infrastructure Kyle Mangini says cash-strapped governments in the European Union are privatising all sorts of assets. An initiative in the European Union, for example, aims to sell assets in the energy space, particularly natural gas distribution.
Industry Funds Management has 45 investment executives globally who only buy and manage infrastructure assets.
"Infrastructure should provide good, steady, long-term returns," Mangini says.
"We should never do 30 per cent per annum."
The fund's infrastructure assets performed well during the global financial crisis and have produced low double-digit annual returns for the past 18 years. SuperRatings says non-profit funds, which include industry funds, have a return advantage over retail funds for the past 10 years of about 1.7 percentage points. That might not sound much, but compounded over 20 years in a fund member's super account, it adds up to a much bigger retirement nest egg.
The outperformance is not all down to infrastructure. Industry funds invest in other "alternative" asset classes - those outside the traditional ones of shares, bonds and cash - such as private equity. Industry funds also actively manage the asset allocation of their funds as investment conditions change, and they have low fees.
Frequently Asked Questions about this Article…
Infrastructure investing means owning large, essential assets such as airports, seaports, power generation and supply, water and sewerage systems, and large heating or gas distribution networks. These assets tend to provide long-term, steady services rather than short-term profits.
Infrastructure assets are often essential services with regulated prices and high barriers to competition, so demand is typically stable. According to industry managers quoted in the article, infrastructure can provide good, steady long-term returns and some funds reported low double-digit annual returns over the past 18 years.
Industry super funds have invested directly in infrastructure—owning assets like a large water and sewerage company in England and Wales, an operator heating 4 million Polish homes, and stakes in airports. That exposure, along with other alternative assets and active allocation, helped non-profit funds outperform retail funds by about 1.7 percentage points over the past 10 years, according to SuperRatings.
Direct ownership is difficult for most individuals because infrastructure assets are big and 'lumpy.' Some exposure is possible through sharemarket-listed vehicles, but the track record of listed toll-road and similar investments has been mixed, so access via listed products requires careful research.
Not all infrastructure deals succeed—toll-road projects have had notable failures (the article cites the BrisConnections collapse with large debts). Infrastructure is generally stable, but individual projects can fail, returns vary, and investors shouldn’t expect outsized annual returns (the article quotes a manager saying 'We should never do 30 per cent per annum').
Large industry managers specialise in infrastructure: for example, Industry Funds Management (owned by 30 industry funds) took a 35.5% stake in a major airport operator and employs around 45 investment executives globally who focus on buying and managing infrastructure. They also actively manage asset allocation and combine infrastructure with other alternatives.
Yes. The article notes that cash‑strapped governments—particularly in parts of Europe—are privatising assets, and EU initiatives aim to sell energy-related assets such as natural gas distribution, creating buying opportunities for infrastructure investors.
Exposure to infrastructure and other alternatives, plus active asset allocation and typically lower fees in many industry funds, contributed to an outperformance of about 1.7 percentage points over retail funds in the last decade. Compounded over many years, that difference can materially increase a member’s eventual retirement balance.
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