Infrastructure Innovator

The asset allocation within superannuation funds is generally settling down to include about a five per cent slice of infrastructure investments. The problem for many investors, both large and small, is getting reasonable quality in that five per cent.
Pushed by the weight of money flowing into superannuation funds, there is a scramble by funds managers and trustees to get set – a scramble that Lazard Asset Management sees as an opportunity to launch to a fund of listed infrastructure funds and companies. Initially it is a wholesale fund, but it won’t be too long before it turns up on someone’s platform as a retail offering.

Lazard’s model is the rise of listed property trust “fund of funds” – vehicles that trustees are increasingly using to manage their property allocation. What is interesting this approach is the opportunities in the sector that Lazard’s research has turned up.

The Lazard fund limits its choices to OECD countries, primarily for the necessity of solid rule of law and minimal sovereign risk when dealing with such long term investments. It further culls the $2.4 trillion choice by insisting on inflation-proof assets. Think Australia’s toll roads with their guaranteed CPI toll hikes. The firm eventually ends up with 70 listed entities around the world it considers worth investing in. Only a half dozen of the 70 stocks are Australian and only two make the initial cut.

The big opportunities coming down the turnpike, so to speak, include increasing privatisation of North American roads. It is only relatively recently that various laws allowed the private ownership of roads. The Chicago Skyway, now owned by Macquarie Infrastructure, is an elevated roadway because that allowed it to be classified as a “bridge” and therefore capable of private ownership and tolling.

Politics play their part as well. It could be argued that the wave of privatisations we have experienced in Australia are effectively the sale of the right to levy tax, an abrogation of government responsibility. Against that principle is the harsh political realities of government’s operating on short-term election cycles, an unwillingness to increase tax bases or borrow to pay for major infrastructure projects and the greater political appeal of the private sector levying steadily-rising “user pays” charges rather than the politicians seeking election.

They’re all rather grubby reasons, but the private infrastructure industry and long-term investors don’t mind.

A theme of the recent Australian super investment conference in Cairns was the difficulty in getting allocation in decent unlisted infrastructure projects. There also are good arguments about the level of fees being charged in some instances and just how fully invested non-listed funds might be while still drawing down the fat payments for their alleged “deal-flow” capability.

Those concerns make viewing infrastructure on a global scale more appealing. Just as in the listed property trust sector, Australia has been ahead of much of the pack, which means local pickings are increasingly picked over, driving investment offshore.

According to Ian Smith, one of the two co-portfolio managers for the Lazard Global Listed Infrastructure Fund, that also could mean some of the sweetheart deals here at the expense of Governments and consumers might be harder to come by.

For that and more, check out our video interview