In times of volatile global markets and economic uncertainty, infrastructure investments are a great safe harbour
If you were one of the few lucky enough to lock in a 5 year TD in 2011, you would have likely locked in a rate at around 6.3%pa. But now that TD is maturing and long-term rates are just 3.1%pa, 50% less than in 2011. If the RBA continues to lower rates, this could fall further by the time your next TD matures. FIIG’s Safe Harbour Strategy enables you to lock in income for as long as 20 years and minimise your exposure to the increasingly uncertain economic cycle ahead.
In times of volatile global markets and economic uncertainty, infrastructure investments are a great safe harbour for investors seeking boring, predictable, long term income. In these uncertain global markets, not even term deposits can offer this. The Safe Harbour Strategy minimises the investor’s exposure to the global economy, including falling interest rates. It does this by investing in infrastructure debt, typically with an investment grade rating and some kind of inflation hedge, that is the income or the capital rises if inflation does break out.
The Safe Harbour Strategy will be a low yielding strategy regardless of how or when it is put together. Finding good value infrastructure debt if you invest in this strategy can certainly increase income above TD rates, but this strategy is specifically designed to be low risk while giving investors more income than term deposits offer. The key risk to look out for is the potential for capital losses if interest rates rise, although with infrastructure bonds typically being linked to inflation, this risk is typically offset at least partially.
Infrastructure offers a safe harbour from economic downturns
Infrastructure investments, whether equities or debt, derive their earnings and therefore investor returns and risk from usage of some underlying infrastructure asset. Infrastructure assets are the physical assets that form the foundation of an economy and allow it to operate and grow. Infrastructure does not include the companies that just use those assets.
For example, infrastructure typically includes transport assets such as airports (but not airlines); seaports (but not shipping companies); roads (but not logistics companies) or rail (but not rail operators). Airlines, shipping companies, logistics companies and rail operators are all subject to the vagaries of competition and commodity prices, meaning that their earnings can be far more volatile. Infrastructure assets on the other hand typically have a monopoly position either by government edict or due to the sheer value of the asset and the length of time required to build a competing asset.
Consider Sydney Airport for example. Sydney Airport is not a monopoly by legislation, but it is protected from competition by:
- the massive size of the asset
- its location
- the cost and availability of land to build a competitor
- cost and time to develop
- community pressure to keep air traffic away from urban areas (and therefore lower viability)
- the democratic system in Australia which ensures no politician wants to make a decision that benefits their predecessors but costs them votes.
Sydney Airport earns income from statutory fees which are protected by legislation, rental income from tenants and car park and taxi fees. Above all else, Sydney Airport’s income is protected because even in a recession, air passenger and freight volumes are relatively stable. Under similar conditions, airlines have to lower their prices to maintain yields on their assets (planes), but this is to Sydney Airport’s advantage.
To further illustrate this point, we collected data on the usage of various infrastructure assets in the US in 2007 and 2009. We used the US for this research as they experienced a far greater downturn in their economy during that time, while Australia benefited from its mining boom. In 2007 the US economy was growing at an above average pace, but by 2009 it was in the middle of the worst recession since the Great Depression of the 1930s.
As shown in the figure below, infrastructure assets experienced very little reduction in usage between 2007 and 2009. Most types of infrastructure experienced falls of less than 5%.
The worst impacted was airports, with a 9% drop. Compare this to airline revenues, which fell 16.5% during this time.
Despite 2009 being in the middle of the US’s worst recession since the Great Depression, the economy still needed the same amount of water, electricity, road travel, and hospital patronage.
Investing in infrastructure with bonds
Below are several examples of the best value bonds currently available within the infrastructure sector.
Indexed annuity bonds
| Company | Maturity/
call date | Trading margin | Yield to
maturity | Running
yield | Capital price | Face value | Capital
value |
| Australian National University | 07/10/2029 | 2.42% | 4.72% | 3.80% | 91.633 | $10,000 | $9,163 |
| Civic Nexus Finance | 15/09/2032 | 2.76% | 5.14% | 4.57% | 108.708 | $10,000 | $10,871 |
|
JEM (CCV) | 15/06/2022 | 2.84% | 4.84% | 5.50% | 66.419 | $50,000 | $33,210 |
|
JEM NSW Schools II | 28/02/2031 | 2.93% | 5.26% | 3.79% | 90.422 | $10,000 | $9,042 |
|
JEM (Southbank) | 28/06/2035 | 3.31% | 5.74% | 4.33% | 104.193 | $10,000 | $10,419 |
|
MPC Funding | 31/12/2033 | 2.93% | 5.33% | 3.87% | 99.435 | $10,000
| $9,944 |
|
MPC Funding | 31/12/2025 | 2.58% | 4.74% | 3.71% | 78.288 | $10,000
| $7,829 |
|
Novacare Solutions | 15/04/2033 | 2.90% | 5.29% | 3.93% | 98.471 | $10,000
| $9,847 |
|
Plenary Health (Casey) Finance | 15/09/2029 | 3.12% | 5.40% | 4.86% | 100.077 | $10,000
| $10,008 |
| Plenary Justice SA | 15/06/2030 | 3.08% | 5.38% | 4.18% | 94.825 | $10,000
| $9,483 |
| RWH Finance | 30/06/2033 | 3.74% | 6.12% | 4.23% | 93.552 | $10,000
| $9,355 |
All bonds listed are in AUD
Available to wholesale investors only
Assumes inflation is 2.5% (RBA target mid point)
Note: Prices accurate as of 24 May 2016 but subject to change Capital indexed bonds
| Company | Maturity/
call date | Trading margin | Yield to
maturity | Running
yield | Capital price | Face value | Capital
value |
| Australian Gas Networks | 20/08/2025 | 2.68% | 5.06% | 2.93% | 136.738 | $13,167 | $13,674 |
| Sydney Airport Finance | 20/11/2020 | 3.19% | 5.26% | 3.61% | 141.181 | $13,560 | $14,118 |
All bonds listed are in AUD
Assumes inflation is 2.5% (RBA target mid point)
Note: Prices accurate as of 24 May 2016 but subject to change
Coal bonds
| Company | Maturity/
call date | Bond type | Trading margin | Yield to
maturity | Running
yield | Capital price | Face value | Capital
value |
| Adani Abbot Point Terminal | 29/05/2020 | Fixed | 6.75% | 8.81% | 6.70% | 91.000 | $10,000 | $9,100 |
| DBCT Finance (Dalrymple Bay) | 09/06/2021 | Floating
| 3.20% | 5.30% | 3.00% | 87.268 | $10,000 | $8,727 |
| Newcastle Coal Infrastructure Group* | 31/03/2027 | Fixed
| 9.34% | 11.08% | 11.49% | 108.833 | USD200,000 | USD217,666 |
*USD denominated bond
Available to wholesale investors only
Note: Prices accurate as of 24 May 2016 but subject to change