A potential multi-billion-dollar privatisation of the Port of Melbourne could unleash a wave of public infrastructure sales and provide an opportunity for self-managed superannuation funds (SMSF) to invest in an asset class that deserves higher portfolio allocations.
The opportunity
In February, Federal Treasurer Joe Hockey flagged up to $130 billion of public asset sales, much of which would come from State and Federal ports and utilities.
Politics aside, infrastructure sales are an obvious strategy. Cash-strapped governments desperately need to fund new transport projects, to cope with population growth on city fringes. Selling assets to a cashed-up private sector, or attracting superannuation investment, makes sense. Superannuants have a useful self-interest in funding infrastructure that makes their life easier.
Industry and commercial super funds have long been attracted to infrastructure. AustralianSuper, for example, allocates billions of dollars to local and global infrastructure projects, and was an early, successful investor in various Australian airports, motorways and train stations.
The logic is simple: high-quality unlisted infrastructure assets sit on the risk/return curve between fixed interest and equities. Chosen well, these assets provide similar yield to blue-chip income shares, with less volatility and risk. That makes them ideal for long-term investors, such as SMSFs.
But accessing infrastructure investment, at least for retail investors, is not as clearcut as it seems. Much of the action takes place through wholesale funds that specialise in unlisted infrastructure assets, and are supported by giant industry or commercial super funds.
The SMSF strategy
SMSFs need a different strategy. Key options include investing in retail infrastructure managed funds, holding ASX-listed infrastructure funds, or buying global infrastructure funds that are unhedged for currency moves, and will benefit as the Australian dollar falls.
Funds are a good place to start, especially for SMSFs with lower risk tolerance. Morningstar lists 15 retail global infrastructure funds, although several have tiny net assets. The Magellan Infrastructure Fund, RARE Infrastructure Value Fund and Macquarie International Infrastructure Securities Fund stand out.
Magellan’s fund had a four-star Morningstar rating and $555 million net assets at 31 January 2014. Almost 80% of the fund is invested in international tollroads, airports, energy and telecommunication infrastructure. Just over a quarter in the US, and a third is in Europe.
The fund has a five-year average annualised return of 18.3% to 31 January 2014. The management fee is 1.05% and a performance fee applies. That is a consistently good return in a lower-risk asset class, from one of the market’s current star fund managers. Gaining infrastructure equities exposure through a fund, rather than buying shares directly, also improves diversification.
SMSFs seeking unhedged currency exposure can choose the smaller Magellan Infastructure Fund (unhedged). Those with at least $500,000 to invest might opt for the fund’s wholesale version.
The RARE Infastructure Value Fund (unhedged) is another option. It typically holds 30-60 global infrastructure euqities, giving exposure to assets in developing and emerging markets. It returned 26.1% over one year to 31 January 2014, and 14.1 per annum since inception.
The direct option
SMSFs that prefer direct investing have 15 ASX-listed infrastructure funds to choose. Although several are a good match with SMSFs, two stand out: Sydney Airport and APA Group. I favour infrastructure assets that have a monopoly-like position, in lower-regulated markets, meaning returns depend less on governments that decide price rises and the like.
Sydney Airport (SYD) is a good example. Politicians have talked about a new airport in the city’s west – a risk for Sydney Airport – for decades. It is still all talk and no action. Sydney Airport’s dominant position is unlikely to change for years, leading to continued growth for its investors.
The well-run Sydney Airport is not cheap, has plenty of debt, and the airline industry has a history of volatility. But Sydney Airport continues to tick higher as it attaches more airlines, and secures higher retail and car-parking fees.
Continued strong growth in Chinese tourism is another plus. Sydney remains the first destination for many international travellers, and Chinese tourists, in particular, have a habit of spending more time – and dollars – in airports. Growth in discount airlines is another long-term positive, and airport infrastructure has proven to be a far better investment than airline stocks over the years.
Like Sydney Airport, APA Group (APA) has an irreplaceable asset. It delivers about half of the nation’s gas usage through its transmission pipelines, and has a consistent record of steady revenue, profit and distribution growth.
Rising population growth will underpin higher long-term demand for gas, although softer gas prices in the short-term could be an issue. With a 6.3% trailing distribution yield, APA looks the pick of Australia’s energy utilities. SP AusNet also has a good record, but faces more regulatory challenges.
One important point to note – distributions from SYD and APA are not franked. There is a tax-deferred element for APA (which means that an SMSF in accumulation mode won’t pay tax on that component), however it is only relatively small.
On balance, SMSFs seeking to construct and maintain a strongly diversified portfolio should consider three things: the weighting of infrastructure within their portfolio, and within that, the split between global and local infrastructure exposure, and currency exposure (for the offshore component).
Global infrastructure exposure through one or two well-performed managed funds, and holding a few key infrastructure stocks directly, such as those mentioned above, could improve the risk/return trade-off within the equities component of SMSF portfolios.
Tony Featherstone is a former managing editor of BRW and Shares magazines.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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- Staff reporter – Buy, Sell, Hold – What the brokers say [3]
- Penny Pryor – Short ‘n’ Sweet – bank bashers [4]
- Tony Negline – How to ask the ATO for advice [5]
- Questions of the week – The pros and cons of annuities and SuperStream [6]