Infrastructure to produce good returns with high interest rates
The standard view that infrastructure assets are bond proxies that perform poorly as interest rates rise is a simplistic view that does not consider the factors behind market movements and the offset impact on interest rates, according to specialist investment manager, RARE.
RARE Infrastructure’s head of Australian retail, Steve Williams said investors should consider how economic activity is driven and how assets can benefit from various environments.
“The important question is whether the underlying ash flow from the infrastructure business are impaired in a rising rate environment,” he said.
“You have to look at what is causing rates to go up. If they are being driven up by increased economic activity, user-pays assets can benefit.”
When it came to select the companies invested in for the RARE Infrastructure Balance Fund – Hedged, the RARE Infrastructure Value Fund – Unhedged, the RARE Infrastructure Income Fund and the RARE Emerging Markets Fund, Williams said a three-tier criteria was adhered to.
“The asset that the company owns must be a hard physical asset [and] secondly, this hard asset must provide an essential service to a society or economy,” Williams said.
“Finally, there must be a robust framework in place to ensure that we, as equity holders of these companies, get paid.
Williams said the four infrastructure funds were benchmark unaware and had a strong focus on absolute return, rather than equity return.
“A total return of 8 to 10 per cent is a more realistic target through a cycle,” he said.
The RARE Infrastructure Income Fund produced an income of 5.2 per cent of the 12 months to the end of August 2017 and according to FE Analytics, performed slightly below the AMI Equity Infrastructure TR benchmark.
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