17 February 2017
One of the topics of discussion over the last week has been about the merits of coal fired vs wind generation. In our view, its time for Australia to rethink what constitutes desirable baseload and peaking generation.
2 September 2016
A common driver of returns for strong performing funds in 2015-16 was high allocations to illiquid assets. That is, property and infrastructure and to a lesser extent private equity. A common feature of these assets are very long investment horizons (often decades), high transactions costs and low liquidity. It is simply not practical – returns would be outweighed by transactions costs – to invest in these types of assets on a short term basis. While returns of these assets have been very attractive recently (as they have benefited disproportionately from the fall in bond rates and the hunt for yield) they present real challenges for funds (or member investment choices within funds) that have a shorter time horizon or have weak (or negative) net member inflows. For these funds, liquidity and investment horizon constraints can severely limit the capacity to invest in these asset classes (and, hence, participate in the recent run of strong returns). Debt investments provide a way of capturing some of these investment characteristics – most notably the liquidity premium – for constrained investors. In particular: 1. debt portfolios can be structured – through their maturity profile - to directly address time horizon/liquidity constraints; and 2. debt investments can provide meaningful liquidity premiums.
26 August 2016
It is not uncommon for funds to manage allocations to illiquid assets by imposing a cap on illiquid assets on a whole of fund basis. For example, no more than 25% allocation to illiquid assets. While this approach is simple – in our view a more nuanced approach is more effective.
12 August 2016
It is quite common for investors to adopt a fixed premium for illiquid assets. That is, if an asset is illiquid it needs to provide an x basis point additional return over comparable investments. We think liquidity risk should be viewed as a continuum and, in general, should be proportionate to overall asset risk profile.
10 August 2016
While hurdle rates can provide a useful tool in ranking and assessing disparate investment opportunities, they are not a panacea, and all too often they reinforce an industry trend of focusing on returns first and risk a distant second.
1 August 2016
What is the role of defensive asset classes within the overall investment portfolio? Do we need to rethink existing strategies in light of today's record low risk-free rates?
22 July 2016
A defining trait of infrastructure assets is their ability to generate consistent low volatility cash flows. This article looks at the evidence from Australian listed stocks to see if this is borne out in the data.
15 July 2016
An article from Infradebt's winter rethink series got a run in Cuffelinks this week. See http://cuffelinks.com.au/bond-indexes-not-represent-markets-diversity/
15 July 2016
Diversification – that a portfolio of distinct opportunities has lower volatility than its individual components - is probably the only genuine free lunch in finance. That said, investors seem to have very different attitudes to diversification across various parts of their portfolio.
8 July 2016
Given yesterday’s credit watch rating announcements for Australia and the big four banks – it is timely to look at the superannuation sector’s aggregate bank exposure. Australian investors won’t be surprised that the big-4 banks are Australian superannuation fund’s largest exposure – but they might be surprised how large that exposure is.
6 July 2016
This article looks at ratings agency analysis of the credit characteristics of infrastructure assets compared with generic corporate credit. These studies show that across a large sample of loans/bonds – infrastructure credits have shown lower volatility, lower defaults, and higher recoveries.
2 July 2016
Base rates are very low and likely to stay low for some time. There are mixed views on what the long-term brings. Will rates revert to longer term averages – ie 5%+ for Australia – or is the new normal permanently lower rates? This is an issue that investors can’t really ignore. Questions investors should be asking: • What does it mean for MIC returns and risk objectives? • What does it mean for investments in government bonds? • What about other long duration assets – such as infrastructure?
24 June 2016
For Article 2 of our Winter Rethink series we look at the composition of traditional Australian fixed income benchmarks. Benchmarks don’t often get a lot of attention – but it is useful to look at fixed income benchmarks to remind ourselves what Australian fixed income portfolios are principally invested in.
16 June 2016
One of the issues we strike is investors seeking a higher level of liquidity for their defensive assets than for their portfolio more broadly. In our view - this isn’t justified – investors can have a material share of their defensive assets invested in less liquid strategies (and earn a higher return as a result) without compromising their capacity to rebalance – even in severe downside scenarios.
3 April 2016
Now I have got your attention with some “click bait” – sorry – I would like to raise some potentially odd outcomes from the current policy settings for renewable electricity. The RET was initially intended as a stepping stone on the path to a carbon price. It works OK when renewables are a small share of total generation. However, it is the wrong policy for decarbonising the electricity system. The RET rewards cheap renewable generation. However, it doesn’t distinguish when, or where, that renewable generation occurs. What we need is a system that rewards the delivery of the electricity consumers and businesses need without the carbon pollution. While this sounds similar – the outcome is very different. While participants need to work within the rules set by government – we would encourage participants to recognise that rules can change and one of the catalysts for change can be perverse outcomes.
19 December 2015
Infrastructure investments have delivered handsome returns over the past few years – most fund managers have easily delivered low double digit returns. However, there are increasing signs that this run of strong performance may be coming to an end.
29 September 2015
While much has been written about how the recovery from the GFC has been disappointing compared to past post-recession recoveries, one aspect that is worth considering is global trade growth and its impact on port assets. Australian ports are a topical infrastructure investment – both from the perspective of existing holdings of privatised assets (Port Botany, Port of Brisbane, Port Kembla and Flinders Ports) but also with the forthcoming privatisation of Port of Melbourne.
30 June 2015
Innovation and technology tends to be more the focus of venture capital and private equity, rather than infrastructure, but increasingly, infrastructure investors need to be worried about the potential for future technological changes to adversely (or positively) impact their investments.
30 June 2015
Electricity distribution and transmission networks have historically been an attractive regulated monopoly business. However, the absolute monopoly enjoyed by electricity networks is under threat. Solar generation and battery storage systems have fallen in price such that they are increasingly competitive with grid-based electricity. While I don’t think that the majority of households will disconnect from the grid, an increasing proportion of customers will source a large fraction of their electricity usage from solar. Increasingly, this will include afternoon/evening use through stored solar power.
24 March 2015
In the various discussions I have being having with Infrastructure investors over past few months, one recurring discussion topic has been the extremely low level of base or risk free interest rates. This article provides a long-term forecast of interest rates as well as discussing why they matter for infrastructure investors.
18 December 2014
The fall in oil prices has seen a blow out in spreads for high yield energy bonds. A key question for 2015 is whether this is idiosyncratic to energy or if it will give rise to further issues more broadly across credit markets.
1 October 2014
This article presents Cameron O'Reilly's longer-term,strategic insights into the electricity sector. Cameron O’Reilly is CEO of the Energy Retailers Association and member of the Infradebt Advisory Board.
27 September 2014
Following an interesting article from Gerald Stack on Cuffelinks we pulled together an article looking at the key differences between infrastructure debt and equity.
23 May 2014
This article raises the question of why superannuation funds leverage their infrastructure investments. At the same time that funds are investing in leveraged infrastructure equity they also allocate a significant chunk of their portfolio to fixed income. Couldn’t they achieve the same result – and save a lot of fees and credit margins to the banks – by investing in infrastructure on an ungeared basis and holding a little less fixed income?