Growth is hard to find.
The latest catch-cry from the financial community is justification for the rush to investments that offer stable and rising revenue streams. However, it doesn't justify the high prices being paid.
Infrastructure assets are a prime example. Global investment managers are competing for a small pool of quality assets, paying enormous sums due to their perceived positive attributes. Recent sales in Australia include the $1.75 billion deal for a 98-year lease on the Port of Newcastle and BG Group selling its Queensland liquefied natural gas pipeline for $6.75 billion to gas transmission business APA Group (ASX: APA).
Citigroup's Australia and New Zealand head of markets Itay Tuchman believes superannuation funds will need to consider vastly broader asset allocations in response to their ballooning funds under management and would include additional investment in global property, infrastructure and emerging markets, according to an article in The Australian Financial Review today.
However, there are a few issues that could make these investments higher-risk for superannuation funds, which are entrusted to invest your money:
1. Sky-high prices
The higher the price, the higher the performance required to achieve a decent return on the asset.
IFM Investors, owned by 30 major super funds and with around $54 billion under management, has recently purchased several assets at prices that have been questioned by many as being excessive.
IFM's latest $US5.7 billion purchase of the Indiana Toll Road at an estimated price of 32x earnings before interest, tax, depreciation and amortisation, proved that the world had gone "nuts", according to two experienced infrastructure advisers.
2. Lack of infrastructure experience
As superannuation funds target infrastructure investments, one has to wonder whether they have the necessary knowledge within their organisations to analyse and accurately value these massive capital-intensive projects with an investment horizon that will span decades, not years like many stock market investments.
IFM recently announced a $685 million write-down on its Pacific Hydro renewable energy business and has now put the entire business up for sale.
What can you do?
Individual investors can access some high-quality infrastructure assets on the ASX, including toll road owner Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD). These companies currently offer a moderate dividend yield of around 4% and healthy capital gains have already been made by early investors. For these reasons, they do not provide good value at current prices, in my opinion.
Like the superannuation funds, investors could be better off financially by avoiding many of the over-priced infrastructure investments at the moment until they are available at an attractive price.
