Nick Langley
The current outbreak of a new virus, COVID-19, has understandably spooked markets, investors and governments.
According to Nick Langley, Co-Founder and Senior Portfolio Manager at RARE Infrastructure, in any time of market turmoil it’s inevitable that investors and financial advisors turn to defensive strategies.
He says: “Investors should prepare for negative events through a well-structured portfolio containing defensive assets. Whether it be the dot com bubble burst, GFC, or a global health crisis such as COVID-19, past and current crises have shown the importance of being defensive.”
Investor portfolios should always contain some level of defence that can be dialled up or down as appropriate for the investor’s objectives or market conditions.
“An ideal ‘defence’ investment is one whose value is to some extent insulated from the full force of a market downturn but will experience a reasonable percentage of the upside when the market moves in a positive direction,” says Langley.
“Fixed interest and cash are generally regarded as the default defensive asset classes but another is listed infrastructure, which is RARE’s singular speciality.
“Within this asset class, we favour regulated assets such as water and energy distribution – poles, wires and gas pipelines – which have high income but low exposure to fluctuations in GDP. These defensive ‘defence’ investments can be mixed with user-pay assets which generally have concession-based contracts with toll roads, rail, ports and airports but typically have lower income returns and are relatively higher leveraged to GDP.
“For Australian investors it is worth noting that global listed Infrastructure stocks have a low correlation to the AUD, domestic equities and global bonds, which makes them an ideal vehicle to provide portfolio diversification. Regulation and long-term contracts generally offer stable cash flow and greater capital stability.
“For instance, since 2010 the RARE Income Strategy has seen a 65% upside capture of monthly gains made by the MSCI AC World Index while bearing only 26% of any overall monthly losses of the same index.
“We believe this performance history would meet most investors criteria for a defensive asset,” Langley notes.
