Cod psychology suggests a person’s car can reveal a lot about their character. Popular tropes include that Toyota drivers are rather staid, that Lamborghini drivers are either ostentatious or innately inadequate and that BMW drivers are generally unaware of the invention of indicators.
You’ll forgive me for not revealing my own preference, which would undoubtedly invite similar prejudgements and perhaps end up doing more harm than good. With your indulgence, I’ll instead stretch the analogy to asset classes and, by further extension, investment decisions.
I ought to make clear from the outset that I have in mind a particular vehicle in which investors, having perused all the options, might most happily trundle off the forecourt: listed infrastructure. To understand why, we first need to quickly tour the showroom and check out its rivals.
As we’ll see, every model has its pros and cons. But I would argue that listed infrastructure is unique in featuring some of the brightest elements of each – and equally exceptional in remaining undeservedly underappreciated by the wider investment community.
Bonds
Dependable but with inherently limited potential, bonds might reasonably be regarded as agreeably solid. Rather like a 1980s Volvo Estate, they can help you get where you want to go – normally without much fuss – but you may not get there especially quickly.
Their appeal lies principally in their pedestrian nature. By and large, you know what you’re getting – predictable cashflows, a lower risk of loss and an essentially guaranteed outcome.
There might be occasions, however, when assumptions of unerring stability are challenged. For example, like potholes that send shockwaves through ageing suspension systems, shifts in interest rates may dent bond investors’ hopes of a smooth ride.
Listed equities
By marked contrast, equities can get you where you want to go somewhat more rapidly. Not least, if conditions are notably conducive, they might be thought of as the investment version of an Ariel Atom – a choice that places performance firmly at centre stage.
But what happens when conditions take an unpleasant turn? Much as an Atom doesn’t even have a roof, equities can find themselves uncomfortably exposed in the face of unexpected events.
The standard trade-off for high performance is comparatively low protection. In the sphere of investment, as on the roads, the last thing you want is a crash that could inflict genuine damage.
Unlisted infrastructure
Unlisted infrastructure can be high-end, reassuringly expensive and maybe sometimes a little too complex for its own good. As such, it bears more than a passing resemblance to the classic Mercedes-Benz 600 Grosser.
Launched in the early 1960s and a longtime favourite among the super-wealthy and assorted dictators, the Grosser was renowned for cosseting its occupants. Analogously, unlisted infrastructure is frequently perceived as comparatively immune to volatility.
Yet this portrayal isn’t strictly accurate. Although it isn’t subject to live valuation, unlisted infrastructure is still at the mercy of volatility – not to mention illiquidity. As with a Grosser, the bumps are still there – you just don’t feel them until you attempt to get out.
Listed infrastructure
The ill-fated Pontiac Aztec is usually cited as the ultimate illustration of a ‘design by committee’ approach to car production. This might be unfair. Ask a chatbot to blend a Volvo, an Atom and a Grosser and you’ll end up with an abomination that takes the concept into jaw-dropping new territory.
Yet listed infrastructure doesn’t actually represent a blend of these three. It’s a different proposition altogether – one that was purpose-built to utilise some of the most attractive components of bonds, equities and its unlisted counterpart.
These include bond-like cashflow predictability, equity-like liquidity and the real-asset stability of infrastructure – in this instance without the lofty fees and possibly irksome lock-ups associated with the unlisted route. Versatile, durable, desirable – a Land Rover Defender, anyone?
Conclusion
Of course, no analogy is infallible. I dare say more than one reader may have owned a Defender – or another model from the Jaguar Land Rover stable – that has sadly failed to embody any of the above qualities. But cut me a bit of slack here.
I fully accept every asset class possesses impressive characteristics and unfortunate drawbacks alike. The point I’m trying to make is that listed infrastructure, in my opinion, is alone in bringing together the best attributes rather than the worst.
It’s also worth noting that, despite a history of equity-beating cashflow growth, listed infrastructure has recently sat at an absolute and relative low in valuation terms. The result: an opportunity for both tactical and strategic allocations.
Ultimately, all the asset classes mentioned here can merit a place in portfolios. In assembling the investment equivalent of a dream garage, though, don’t overlook the one vehicle that might just provide a bit of everything.
Tim Humphreys is co-manager of the IFSL Marlborough Global Essential Infrastructure fund.