Infrastructure is an interesting investment class, should it be part of your investment strategy?
Some investors just group infrastructure into the same asset class as normal shares. Whereas others like to split out different types of businesses on the share market like property, infrastructure and normal businesses.
If you want to buy shares of infrastructure businesses like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD), then you can purchase them just like if you were buying shares of CSL Limited (ASX: CSL) or Wesfarmers Ltd (ASX: WES).
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What's so good about infrastructure?
The attraction of infrastructure is that it can offer reliable cashflow (for distributions and dividends) as well as capital growth over the long-term.
That may sound like the same benefits of a real estate investment trust (REIT). But, there are plenty of office buildings in the CBDs of cities. Shopping centres are everywhere. Small-scale warehouses can be built in many locations across a city.
Infrastructure offers the allure of unique assets. There is only one particular (toll) road for a transport corridor. Airports are unique. There's only one energy grid. And so on. Infrastructure can essentially be a monopoly with reliable demand.
Before COVID-19 came along, Transurban and Sydney Airport were two of the best ASX shares for solid income and consistent growth. Everyone appreciates being able to drive faster to work or school. If you want travel to Sydney from another state or country then flying is the only real efficient option.
You can see the same sort of economic moat power of assets like energy transmission, energy distribution, water utilities, energy storage, telecommunications assets and so on. They are all strong, defensive ideas.
Is infrastructure a good investment today?
COVID-19 has really put a spanner in the works of many infrastructure businesses. Airports are hardly seeing any passengers at the moment. Sydney Airport is currently showing the number of passengers is down by more than 90% each month, though domestic passengers has slightly increased compared to April and May.
Toll roads are seeing a return of some traffic, but not all of it. Some people may be trying to save some money and some office workers are still at home.
It's hard to say what the right price to pay for Transurban and Sydney Airport is. Low interest rates theoretically increase the valuations of assets. But COVID-19 has caused a large drop in earnings. Who knows when passengers will start flying in the same numbers again? Will a vaccine or healthcare treatment be completely approved, leading to a possible return to life as we knew it before COVID-19 came along?
One option could be an infrastructure investment fund like Magellan Infrastructure Fund (ASX: MICH), which is currency hedged. It's invested in a variety of different infrastructure businesses like Transurban, Atmos Energy, Crown Castle International, Red Electrica, Eversource and Enbridge.
When you're invested in a fund of infrastructure assets then you don't have as much asset-specific risk and you don't need to worry about which particular infrastructure shares to own at any given time. Over the past year and three years the Magellan Infrastructure Fund has outperformed its global infrastructure benchmark by 7.3% and 5.9% per annum respectively.
My preferred ASX infrastructure share
In terms of individual ASX infrastructure shares, my favourite pick is actually APA Group (ASX: APA).
The business owns a vast network of 15,000km of natural gas pipelines around Australia with a presence in every mainland state and the Northern Territory. It also owns or has interests in gas storage facilities, gas-fired power stations and renewable energy generation (wind and solar farms). APA owns, or manages and operates, a portfolio of assets worth more than $21 billion and delivers half the nation's natural gas usage.
APA has increased its distribution every year for the past decade and a half. I think it's a very dependable share.
Foolish takeaway
I think infrastructure can be worth a spot in an investment portfolio. If you want a diversified infrastructure allocation then something like Magellan's offering could work well, otherwise I think APA is the best pick today.
