Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 436

Infrastructure and the road to recovery

It has been a remarkable 18 months for infrastructure but it should come as no surprise that the pandemic's impact on infrastructure assets has been varied. In a sector that consists of a range of industries and assets, which are often subject to differing underlying drivers, asset performances can fluctuate. 

Assets like airports and toll roads have suffered from reduced travel, many regulated and social assets were resilient, while communications and technology infrastructure enjoyed an environment of increased demand.

So given the varied performances, what might the road to recovery for infrastructure look like? And what role could infrastructure play in a portfolio?

Our recent webinar Infrastructure and the road to recovery examined each of the different categories of infrastructure and how we believe they may perform as the world learns to live with COVID. (needs link)

Infrastructure consists of a broad array of assets which can be categorised in a number of ways, but a common approach is to look at them by sector. Different sectors – and indeed different individual assets – can have varying characteristics that affect their performance depending on what is going on in the broader global economy.

1. Social infrastructure

The first category is social infrastructure, which is often structured as public private partnerships (PPPs). PPPs are a common way of delivering infrastructure through a partnership between private investors and the public sector. Social infrastructure includes assets like schools, hospitals and justice facilities.

Importantly, for investors, these generally have an availability-based revenue model. This model means the owner of these assets gets paid for making the asset available, regardless of how many people use the asset. The payments are often fixed and usually from a government counterparty, which provides high security of revenues for the investors.

Because these types of assets are not impacted by volume or by usage, they tend to be largely immune to what is going on in the broader economy and so were not greatly affected by COVID-19.1 A key feature of social infrastructure is the stability of revenues driven by factors such as the availability-based revenue model, and the fact they are often coming from a highly rated government counterparty.

2. Regulated infrastructure

The second category consists of regulated assets, which is typically characterised by inelastic demand because these assets provide essential services that we use every day like water and electricity.

These assets have regulated pricing models, meaning pricing is determined by a regulator under a regulatory framework that applies over an extended period. In many jurisdictions, this period can be five years, although for some assets it can be longer.

Due to the inelastic demand and regulated pricing, we saw many regulated assets perform quite resiliently during the pandemic, though we did observe some assets being impacted by heightened risks, including higher counterparty risk (as they depend on customers paying their bills), as well as increased regulatory risk in some jurisdictions.

3. Volume-based (or patronage-based) infrastructure

The third category — and, in our view, the most impacted by COVID-19 — is volume-based infrastructure or patronage-based infrastructure. These are assets like airports, toll roads and seaports that have revenues reliant on the level of usage.

Still, even within this sector, we saw different assets perform differently. Toll roads were impacted by lockdowns as traffic movements were lower, but as lockdowns lifted movement quickly picked up.

It is clear that the airports sector has been greatly impacted due to ongoing travel bans. For example, passenger numbers at Australia's airports fell dramatically relative to pre-pandemic levels due to the restrictions.

4. Communications infrastructure

The fourth category is communications infrastructure, which includes assets like telecommunications towers, data centres and fibre networks.

The high demand for data due to increasing usage of things like streaming services and video conferencing meant this sector was already performing strongly pre-COVID.

The pandemic saw demand for data increase further as people moved work online and this, in our view, will mean communications assets will continue to do well.

So, what is the role of infrastructure in a portfolio?

People have different perceptions around this question, but we believe a well-diversified infrastructure holding in a broader portfolio can play a number of roles.

First, it can provide consistent returns. Infrastructure tends to be relatively resilient through market cycles. While it is not immune from the wider economic cycle, many infrastructure assets provide essential services that people use on a daily basis, which can provide resilience. Services like water and electricity enjoy relatively consistent levels of demand and are generally less influenced by economic factors and market cycles than other types of businesses.

Second, infrastructure can provide a portfolio with diversification. Typically, infrastructure has a low correlation to many other asset classes, which can help to lower overall portfolio risk.

Third, infrastructure has the potential to provide lower volatility and some level of drawdown protection when markets are falling due to the essential services nature of the assets. Though the flip side of this is that when equity markets are booming, infrastructure is unlikely to demonstrate the same type of returns.

Fourth, infrastructure can offer a level of inflation protection as many infrastructure assets have revenues that are linked in some way to inflation.

And finally, infrastructure can offer stable income to a portfolio as the revenues that many infrastructure assets generate are often set by regulation or under long term contractual arrangements.

So where to next for infrastructure?

As demonstrated by their performance during COVID-19, we believe each sector will likely perform differently as the world recovers from the pandemic.

While passenger movements at airports have been affected by the pandemic, in our view, there is a high level of pent up demand for travel, and we are likely to see passenger numbers bounce back relatively quickly as restrictions are eased. That said, we believe it will probably take several years for traffic to return to pre-pandemic levels.

Social infrastructure and regulated assets are likely to be fairly resilient in our view. Meanwhile, we believe communications infrastructure will likely continue to thrive as the demand for data continues to proliferate.

That means overall, we view the outlook for infrastructure as quite resilient.

We believe the essential services nature of these assets will likely continue to be attractive to investors due to their relatively stable cash flows, and, in our experience, as governments look to infrastructure as a means of driving economic growth, it is likely there will be further opportunities for investors.


John Julian is Fund Manager of AMP Capital Core Infrastructure Fund and Managing Director at AMP Capital, a sponsor of Firstlinks. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. For a list of sources and important disclaimer information, see the here.

For more articles and papers from AMP Capital, click here.



The 60/40 Portfolio – saying bye to old friends and welcoming new ones


Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates


'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.


Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.


Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.


Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.