Osorio says it’s important for investors to specifically seek out alternative products that invest in pure play infrastructure, beyond traditional stock market opportunities.
“For [higher net worth investors], I think it is important for them to seek access to private capital infrastructure,” she says.
In some countries, these investments have been allowed and encouraged for many years.
Osorio advises this because she says private capital infrastructure investments are both close to the asset or projects “and more directly managed to explicitly provide attractive returns for investors.”
While she notes there are a number of utility stocks in the public markets, they tend to be large, vertically integrated companies that have a number of operations.
“Unlisted infrastructure is less correlated with the public markets and provides more of the characteristics that make infrastructure allocation attractive for a diversified portfolio,” she says.
Role of Regional Forces
Osorio says one of the challenges particular to infrastructure as an asset class is accounting for regional differences.
“It’s a very global asset class, but also important to note is that it’s subject to a lot of regional forces,” Osorio says.
This is why she encourages diversifying not only among the asset class itself, but across different geographies to mitigate risk.
When investing in renewable energy, for instance, she says investors might hit a period where for a year or two, a resource like solar or wind power may be impacted due to climate change or weather patterns.
Regulated utilities are another challenge, she says, using the example of an unfavorable rate hearing that impacts an investment’s performance.
“This is a fine balance which can swing in either direction, from time to time,” she says, noting it’s a “consistent challenge” across all countries Fiera invests in.
By having a diversified portfolio, however, investors can offset challenges or risk in one area, with assets in other jurisdictions.
Mix Yield and Capital Appreciation
When Fiera puts portfolios together, Osorio says it looks beyond the assets and projects that constitute them at the mix of returns.
“As an investor I’d be seeking a balance between yield and capital appreciation,” she says. Yield tends to come with stable, core investments which are “probably on the lower-returning side but will give you nice cash yields.”
On the flip side, she adds, Fiera invests in what they call “Core Plus” investments. These tend to be investments that have higher growth prospects—and therefore higher returns—but require reinvesting the capital back into the business.
“You tend to give up a little bit of yield, but then through portfolios, you can do a combination of both yield and capital appreciation,” she says.
Roughly speaking, Osorio adds a good rule of thumb is targeting half of a portfolio’s expected returns from yield and half from capital appreciation on a blended basis.
Originally posted by Barrons in January 2020.