21 Sep Insights #001: Markets Behaving Badly
Three Minutes with Nicole Connolly
Mental health studies measuring the effects of COVID-19 are starting to roll in. And guess what? Results show we’re all feeling a bit anxious, delaying important decisions, even questioning our strategies for work, social life, and yes, investing.
If there’s anything COVID-19 and every other economic upheaval since the 17th century has taught us, it’s that the most practical path to recovery is diversification, diversification, diversification. Which is easy to say, but a lot more challenging to achieve when you’re operating within the complexities of global financial markets.
One of the most overlooked options for achieving diversity is the potential for additional returns you get when investing in illiquid assets. These days, we have more ways to tap into illiquidity premiums than ever before—privately held real estate, well-established hedge funds, and private equity, to name a few. Yet, statistics show, many investors leave these options off the table.
If your investment horizon is further away, the excess returns of illiquid investments are worthy of serious consideration. Now let’s say you already have a nice chunk of exposure to illiquidity premiums. The next thing I would consider is quality, and much of the evidence I have found thus far points to infrastructure as best-in-class.
Historically, illiquidity premiums for unlisted infrastructure have been substantially higher than alternative investments with much lower risk profiles. Moreover, essential infrastructure’s illiquidity boost has remained strong since the emergence of the pandemic. And now, for the first time unlisted infrastructure is within reach of Australian SMSF investors.
Both historical evidence and meticulous performance projections hand a clear advantage to SMSF investors who place up to 15% of their portfolio into long-term unlisted infrastructure. Yet most have little, if any, investment dollars allocated to the asset class. In fact, many SMSF investors don’t even know that unlisted infrastructure is an option.
While unlisted infrastructure hasn’t been entirely immune to the impacts of COVID-19, the underlying logic for investing in the asset class hasn’t changed. Throughout the current economic cycle, unlisted infrastructure has netted higher risk-adjusted returns, continues to show defensive qualities during market downturns, and hasn’t veered from its long-run, stable cash flows.
Call me biased but Invest Unlisted’s Core Infrastructure Fund (CIF) is a perfect example. For the year ended 30 June 2020, three of our four underlying Fund investment exposures provided positive returns between 1.9% and 3.6% — despite the upheavals triggered by COVID-19.
So, yes, you can wait for your moment to snag stocks, bonds, and equities when they roller coaster down to your target price. Then watch with anticipation as they climb back up. But, if moody markets make you queasy, I recommend training your focus on both current and future cash flows, the cost of equity, and those nagging portfolio deficiencies.
In the case of long-term, illiquid infrastructure, cash flows can be set as many as 99 years into the future. Important nuances like this make investing on a particular date at a specified unit price much less important than aiming for exposure to a high-quality source of long-term returns with a relatively low-risk profile.
If COVID-19 has proven anything in the financial markets, it’s that anchoring your portfolio with an allocation of essential infrastructure is likely to allow you to stay on course to your investment objectives.
About the Author
As CEO of Invest Unlisted, Nicole Connolly focus is providing high-net-worth investors, financial advisors, and self-managed superannuation funds with affordable access to the steady returns of unlisted infrastructure. Introduced in January of 2016, the Core Infrastructure Fund boasts deep diversification across 32 distinct assets, nearly $200 million in funds under management.