What is it?
In the current world of low interest rates and high uncertainty in what our everyday life will look like, something known as an ‘availability’ cash flow has taken centre stage. The concept is fairly simple – an investment where you get paid simply for making an asset ‘available’ rather than for how much it is used.
The term is commonly used in infrastructure, with one such example being when a government needs to build a school. The infrastructure fund will build a school and agree to maintain it for a fixed period (around 25 years). In return, the government pays an agreed amount annually for making the school available for use, often rising with inflation.
In this scenario, the closure of the school due to a pandemic does not affect your cash flow, as it is not dependent on whether the asset is in use or not. Evidently, this is an attractive quality in the current environment; however, this resilience has always made it an attractive addition to a portfolio regardless.
What are the risks?
One of the interesting questions with infrastructure backed by the UK governments for example is why the return is higher than simply lending to the government in the form of gilts given, that they both rely on the same source. The key reason for the difference is that there is transfer of additional risks onto you as the provider of capital. This may sound high-risk, but taking this on enables the ability to make a return on your investment. The important thing is that these risks can be managed appropriately and that we are receiving a requisite return.
We believe the current returns on these type of assets compensate well and the significant gap between that return we receive and the current long-term gilt yield is at one of its widest points. This underpins part of the reason we believe these assets will be worth more in the future as it becomes harder and harder to find attractive yielding assets.
Diversifying the portfolio
The next key point is a little less intuitive regarding the risks when investing in infrastructure assets – we would like them to complement the ones we already have in our portfolios. If we add an investment with all the same risks, we will simply be doubling up our bet. It would be like adding a £10 bet on black at the roulette table to the £50 you already had placed on black. Instead, what we try to do is have different exposures all over the roulette table, so that whatever the outcome when the wheel spins, we have a favourable environment for some of our investments.
In the context of an actual casino, this is of course a poor strategy because your expected return on each bet is to make a loss, however this is not necessarily the case in investment. We can find investments such as ‘availability’ infrastructure that complement our exposure to stock markets through different risks. The ultimately means that we believe we can use these to create a more robust portfolio that can generate attractive returns in a greater number of possible outcomes.