4 min read 19 May 20
Summary: When we think of infrastructure, large physical assets typically spring to mind. This is because the likes of airports, roads and power stations have physical footprints that shape the environment around us and our perceptions of it.
However, our interaction with physical infrastructure goes well beyond the use of transport, energy and utilities. For example, the delivery of many public services like education and healthcare generally involves large buildings, such as hospitals, schools and university campuses.
Less obvious perhaps is the infrastructure that facilitates the digital economy. It may not dominate the landscape like electricity pylons or ports, but the buildings and networks underpinning it are equally relied upon today.
This is perhaps because many digital interactions have become so frictionless that we rarely think about the infrastructure supporting them. Yet behind each contactless payment, for instance, is a vast network of ‘rails’ connecting consumers, merchants, processors and banks.
Even when the infrastructure enabling online activity has a large physical presence, it is often out of sight. When we stream videos on our mobile phones, it is unlikely that we spot the communication masts or underground optical fibre networks that transmit the data along our journey.
Likewise, when we store digital documents and photos on ‘the cloud’ – where they are accessible wherever and whenever we might want them – how many of us spare a thought for the vast warehouse-like data centres that store and process our information?
Each day, we depend on this unseen infrastructure – which I like to think of as ‘evolving’ infrastructure – every bit as much as we do on the more familiar infrastructure that forms the backbone of the traditional economy.
As a long-term investor in infrastructure, this part of the asset class holds great promise, in my view. I believe evolving infrastructure can often provide stronger structural growth than more traditional infrastructure assets. This is because it is used by fast-growing parts of the global economy – including communications, e-commerce and technology.
It logically follows that more of this infrastructure will be needed increasingly over the coming years. The more we use our mobile devices to bank, shop and view content, the more phone masts will be needed to transmit the data – and, of course, the more data centres will be required to process it. Growing demand should present opportunities for patient investors.
One way to tap into this area of the market is to invest in the shares of companies that own or control this critical physical infrastructure. These companies generate income streams from their infrastructure assets, which are in turn distributed to their investors through dividends. Importantly, even though these assets are often unseen, their physical nature provides a strategic barrier to entry for would-be challengers, protecting the value of the income as well as that of the asset itself.
Admittedly, the trajectory of evolving infrastructure assets, and the income generated from them, can be less predictable than that of some more traditional infrastructure assets. The likes of energy and water providers are typically better able to reliably churn out a consistent income from when you invest, given the established and resilient demand for their services. However, therein lays the opportunity offered by evolving infrastructure: if companies succeed in rapidly expanding parts of the infrastructure market, they can deliver exciting levels of growth over the long term.
For this reason, I believe that infrastructure investors must be alive to the various opportunities offered by evolving infrastructure assets, even though they can easily go unnoticed in most people’s daily lives.
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.