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Topics: ethical-investment , consumer-finance , business-economics-and-finance , australia. First posted May 28, Contact Rebecca Hyam. If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content. Read about our editorial guiding principles and the standards ABC journalists and content makers follow. Learn more. By Allyson Horn. By political reporter Stephanie Borys. Every 10 minutes, cybercriminals are preying on Australian businesses and individuals, leaving some people tens of thousands of dollars worse off.
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Emerging countries have a burgeoning middle class who want to travel and developed nations have much infrastructure that needs upgrading. Jason Beddow, managing director of Argo Global Listed Infrastructure, says fiscal constraints in Western countries are creating opportunity. The long-term outlook for global infrastructure has never been stronger. Beddow says global infrastructure suits investors who are overexposed to Australian shares and property.
Chosen well, global infrastructure should provide a mix of yield and growth, with lower volatility. This outlook is attracting capital to infrastructure funds. Institutional investors globally expect to lift their exposure to the asset, having been below their target portfolio allocation, notes Preqin. There are sound arguments to invest in global infrastructure, but care is needed.
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Buying assets during booms rarely succeeds, particularly if investors have a short-term outlook. Infrastructure is vulnerable to interest rate rises because the sector has higher debt, and a higher discount rate reduces the present value of future infrastructure cash flows.
Also, infrastructure and other yield sectors become relatively less attractive to income investors when rates rise. If the US year bond yield, trading just above a multi-decade low, lifts faster than the market expects in the next few years, global infrastructure could underperform. That is true of core assets, such as utilities, but many infrastructure funds and sharemarket indices have exposure to higher-risk infrastructure assets, including in emerging markets, that do not suit conservative investors.
Gerald Stack, head of infrastructure investment at Magellan Financial Group, excludes assets that have competition, commodity-price sensitivity or sovereign risk. Magellan, a top-performing infrastructure investor, aims to return 5 per cent plus inflation in the Magellan Infrastructure Fund, on average.
The fund delivered Investors should include the global financial crisis when assessing infrastructure returns because these funds own long-term assets. Strong recent performance from infrastructure funds and exchange-traded funds ETFs risks blinding investors to typical single-digit returns over a cycle. As important is assessing performance against risk. Simply, when global equity markets fell over a month, the fund on average had a zero return.
It held its value as share prices dropped. When sharemarkets fall, infrastructure valuations typically fall less, and vice versa. The relationship is even weaker for infrastructure assets that are not listed on stock exchanges. That means reducing some equities exposure and adding cash, fixed interest and infrastructure.
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Fears are growing that the longest equities bull market in history will end abruptly in the next few years, when retail investors least expect it. Professional investors have been making portfolios more defensive by increasing their cash allocations, surveys show.
Moreover, retail investors who live off their investment income have limited options for yield. The Reserve Bank cut the official cash rate to 1. Some economists tip a 0. In that context, a return of 5 per cent plus inflation from global infrastructure looks attractive. In theory, that return has less risk than buying Telstra or a big bank stock for yield — a strategy favoured by income investors who incur significant equity market and company risk to achieve a grossed-up yield after franking credits of about 8 per cent. Global infrastructure funds potentially offer similar returns over the cycle; diversification benefits by exposure to dozens of companies across sectors and countries; ownership of assets with predictable income streams and often inflation-linked revenue; and high barriers to entry — at a time when global infrastructure has decades of growth ahead.
These attractions, however, will not appease new investors if rates turn higher and global infrastructure struggles. The sector can be volatile at key turning points in interest-rate expectations. For now, inflation worldwide is mostly muted, rates are low and the prospect of a jump in inflation and rates seems unlikely. But that could change quickly. For example, a US year bond yield of 3. If the US year yield heads above 4 per cent, infastructure starts to become expensive but we think that the risk of that happening in the next 12 months is low. We have a positive medium-term outlook given demand for unlisted infrastructure assets remains strong globally, with many investors either underweight or seeking to allocate additional capital to unlisted infrastructure investments.
Rising infrastructure valuations are worrying institutional investors, notes Preqin. These high returns are concerning for new investors who cannot withstand short-term loss if infrastructure gives back some of its recent outperformance. Langley says rising earnings are justifying valuations.
That multiple ranges from The multiple has not changed that much over the past seven years. Risks aside, long-term investors could consider a small portfolio allocation to global infrastructure. Global pension funds on average allocate about 5 per cent to infrastructure and some local superannuation funds have higher exposure. Langley believes 5 to 7 per cent is an appropriate allocation in a balanced retail portfolio that is accumulating wealth.
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