Simply irreplaceable

This article is based on research from Jeremy Anagnos' Market Update. Expand your knowledge here.

When it comes to investing, there’s a strong case for focusing on things we can’t live without.

Whether it’s our roads, bridges or the copper wires carrying electricity from the power station, these are assets that underpin how we live our daily lives – and they require constant upkeep to continue functioning.


Solving a crisis

The problem is, in many parts of the developed world, many of those essential assets are being left in a state of continuous disrepair. As CBRE Clarion Securities infrastructure chief investment officer explained in an interview (LINK) with us recently, one of the key features of the assets owned by the listed companies in which he invests is that they’ve “been there for a long time.”

They’ve “done what they’ve been built to do,” he added, and they’re essentially “irreplaceable,” but they’re constantly ageing. He highlighted the centuries-old cast-iron pipes carrying water underneath New York City and the increasing degradation of many bridges in North America as examples.

Complicating this further, he continued, if the average age of many of these assets is around 30 years, “you’re only replacing a certain percentage of that every year.” Put another way, if asset owners are extending the lifespan of about 5% of the infrastructure base every year, the remainder gets a year closer to the deadline.

Therein lies the opportunity

If this sounds like an unsustainable cycle – well, that’s where the investment proposition comes in. As an investor in listed infrastructure companies, Anagnos said, you’re “constantly going through that reinvestment process,” which suggests a stability in returns.

Anagnos explained that the “nature of the asset class is also its opportunity,” as the essential nature of these assets provides a “very predictable level of growth” for the companies that own and operate them.

“Mostly what they’re doing is reinvesting in what they own,” he said. “It’s a constant level of reinvestment as they upgrade those old pipes and enhance their toll roads and bridges, and really just improve the reliability and safety of the network overall.”

Constant reinvestment due to the essential nature of these infrastructure assets and growth through upgrading them over time – arguably the best of both worlds.

Overcoming home bias

Anagnos said the CBRE listed infrastructure approach prioritises developed markets due to the above characteristics. He noted that in Australia, many of the kinds of assets being discussed – toll roads, airports, parts of the energy grid – have already been privatised, and this allows for “capital that’s been raised by the private sector to then be placed in the infrastructure sector.”

Because this process is already well underway, though, he argued listed infrastructure investors in Australia should consider looking offshore –  the UK and Canada, for example, are following Australia’s lead at the moment.

“The Australian market is mostly privatised from an infrastructure perspective,” he explained, “so we think investors would benefit from having exposure beyond the Australian market and looking further into some of the international markets.”


Look out for further insights from Jeremy in the coming weeks. He discusses this idea and more as part of our Market Update series.


The opinions expressed in this content are those of the author shown, and do not necessarily represent those of No More Practice Education Pty Ltd or its related entities. All content is intended for a professional financial adviser audience only and does not constitute financial advice. To view our full terms and conditions, click here.

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