Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 182

Populism and the risks in regulated assets

Global monetary authorities are continuing to engineer a low bond yield environment in an ongoing effort to stave off the onset of economic stagnation. Against this backdrop, interest in infrastructure as an asset class has intensified, offering yields that look appealing to retail investors and liability-driven institutional investors such as defined-benefit pension funds and insurers.

But before simply treating infrastructure as a ‘bond-proxy’, investors need to understand its unique characteristics. Foremost of these is the presence of regulatory risk, which represents arguably the strongest case for treating infrastructure as a separate asset class from broader private equity or ‘real asset’ allocations.

By virtue of their monopolistic positions (underpinned by inelastic demand for essential services and prohibitively high barriers to entry), ‘core’ infrastructure assets such as utilities are typically subject to some form of economic regulation. Not surprisingly, regulatory risk is a key issue. In one survey, it was nominated as the biggest challenge by respondents, outstripping macroeconomic risk, manager selection and other issues.

Complexities of assessing risk

However, assessing and managing regulatory risk can be difficult. For instance, regulatory and political risk are often seen as synonymous. Yet there is an argument that a business directly subject to government decisions should be treated differently to one that has the protection of a separate and independent rule-bound regulator which must balance all stakeholder interests. In the UK, for instance, the water regulator has a statutory responsibility to ensure the financial feasibility of privately owned water companies.

Prima facie, this reduces the likelihood of the regulator imposing an adverse and financially crippling decision. Contrast this with the more heavy-handed fate suffered by the Gassled investors at the hand of the Norwegian government’s oil and energy ministry, and it is easy to see why rule-bound regulators are something of a shield from opportunistic politicians. This distinction has become ever-more crucial in the wake of populist election results such as Brexit and Donald Trump’s US presidential victory.

A further layer of complexity stems from the fact that regulation is dynamic, and that regimes can be expected to evolve over time in response to changes in the broader economic, political, and technological environment. Across our portfolio, we have already seen a progression from cost to incentive-based forms of regulation. In some of the more mature jurisdictions we operate in, regulation has evolved further still – with regulators employing a variety of new tools, methods and approaches in response to changing regulatory priorities.

The UK is perhaps the best example of this evolution. Developed in the 1980s in response to the ‘gold-plating’ observed under cost-based regimes in the US and elsewhere, the ‘British model’ of incentive regulation worked very well for two decades (and subsequently was adopted worldwide).

By the late 2000s, however, questions were being raised about the continued efficacy of the incentive scheme. This led to a once-in-a-generation overhaul of regulatory regimes in several UK sectors.

A hallmark of the new systems included smarter mechanisms designed to overcome the classic information asymmetry that exists between a typical regulated utility and the regulator. They also included an emphasis on innovation, ‘capex-lite’ solutions and more direct customer engagement. Regulators worldwide are also seeking to design systems incorporating behavioural economics insights, which have revealed how customer inertia and biases can lead to perverse and costly outcomes.

Investors in Australia are taking note, as it is only a matter of time before some of these features are introduced here. The current political machinations aside, our vast power networks have to contend with the economic reality of high maintenance costs, an increasingly distributed generation landscape and a fit-for-purpose model of regulation.

Changing risk-reward profile of regulated assets

Our view is that these latest innovations in regulatory design will fundamentally change the risk-reward profile of regulated assets. Specifically, they have the potential to increase both outperformance and underperformance. Investors will therefore need to evaluate the ‘alpha’ potential of specific companies rather than seek generic ‘beta’ exposure to a given sector.

Another lesson is that, with so many potential triggers for change, it is dangerous to characterise a historically ‘benign’ regulatory regime as less ‘risky’. Indeed, the opposite could be argued: a regime that has just undergone a step-change can be viewed by investors as ‘de-risked’ for a period of time.

So what are the keys to success in this brave new world of infrastructure regulation? In our view, they include a sufficiently long-term investment horizon, strong shareholder representation and associated control, a proactive approach to stakeholder management and a focus on sustainable, operationally efficient, and customer-driven outcomes.

 

Ritesh Prasad is a Senior Investment Analyst in the Unlisted Infrastructure team at Colonial First State Global Asset Management. This article provides general information not specific to any investor’s circumstances.

 

  •   17 November 2016
  •      
  •   

 

Leave a Comment:

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 639

Thank you for the hundreds of responses to our Reader Survey and to maximise the sample size, we’re leaving it open until this Sunday. Here is an overview of the results so far.

  • 27 November 2025
  • 1
Investment strategies

Where to hide in the ‘everything bubble’

It might not be quite an ‘everything bubble’ but there’s froth in many assets, not just US stocks, right now. It might be time to stress test your portfolio and consider assets that could offer you shelter if trouble is coming.

Investment strategies

The ultimate investing hack: dividend growth stocks

Investors often fall prey to ‘amygdala hijacks,’ letting emotion trump reason. By focusing on dividend-growth with stocks instead of volatile prices, you can steady your mindset and let compounding do the work. 

Investment strategies

CBA or global banks?

CBA’s recent pullback highlights single-stock risk. Global banks trade at lower P/Es with rising earnings and dividends, offering investors both income potential and long-term value beyond the local market.

Investment strategies

Global dividends rising, but Australia lags

Global dividend growth surged in the third quarter, with median growth of almost 6%. Australia was a notable exception as dividends fell, thanks to flagging mining company payouts.

Economy

I called inflation's rise and fall and here's what's next

In 2020, I warned that surging US money supply growth would spark inflation. By early 2023, I said US money supply was dropping dramatically and that meant inflation would decline. Here's what happens next.

Superannuation

Are excessive super funds giving Australia “Dutch Disease”?

The irony is profound: a system designed to secure Australians’ futures may be systematically dismantling the economic diversity necessary for long-term prosperity.

Investment strategies

Could your children pass the inheritance ‘stress test’?

You devote years of your life working, saving and investing, striving to build a legacy that will outlive you. Before any wealth moves to the next generation, here are six questions every parent should ask themselves.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.