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Advisers looking to infrastructure for downside protection

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A study commissioned by Foresight Group has found that almost 70 per cent of UK financial advisers would consider recommending a diversified infrastructure fund in order to address concerns about Brexit, a market correction and equity market volatility.

 
“Infrastructure is continuing to grow in popularity as its role as a low correlated, defensive asset class is now far better understood,” says Nick Scullion (pictured), Head of Foresight Capital Management.

According to the survey, in recent months there has been a decrease in the use of some traditional alternatives to equities such as bonds, gilts and absolute return funds and increasingly, infrastructure and property are being used for their defensive qualities.
 
“We have seen significant demand building among advisers to provide their clients with exposure to a global infrastructure fund. The survey conducted in May 2019 demonstrated an appetite for infrastructure investment funds on account of their increased availability, low correlation to equity markets and low volatility,” says Scullion (pictured).
 
The survey found that over the next three years, almost two thirds of UK financial advisers expect to see clients’ allocations to global infrastructure increase. This compares to a similar survey by Foresight in 2017 which found that only 32 per cent of advisers predicted an increase in clients’ allocations to global infrastructure.
 
Scullion explains: “Infrastructure funds compare favourably to fixed income returns in the current low interest rate environment as well as predictable revenue streams from the sale of the energy they generate. On top of that they benefit from index-linked government subsidies that support them.”
 
Many of the assets that the renewables infrastructure companies invest in have low operational risk and variability, in particular funds investing in solar and onshore wind. Scullion also points out that it is apparent that flexible grid management is going to help address intermittency issues associated with renewable energy.
 
In terms of regions, Canada has a good environment for renewables according to Scullion. “It benefits from a large amount of generation of hydroelectric and wind – and it is a well-defined asset class.” Foresight’s recently launched Global Infrastructure Fund currently has a 27 per cent allocation to Canada.
 
“The developed and emerging economies around the world continue to invest heavily in infrastructure, while at the same time, they are having to come to terms with addressing climate change issues as they transition their energy systems away from fossil fuels. We also target emerging countries at the asset level as they have typically been under funded and have excellent growth opportunities,” he adds.
 
Foresight is also seeing significant investment in subsidy free renewables in the Iberian Peninsula. “As panel prices continue to fall, that will become a feature of new investment in northern Europe and other economies. As the costs come down, it is becoming more viable to invest,” he explains.
 
Scullion also reports that they are seeing penetration into renewables in countries that traditionally haven’t benefitted from renewable investment, such as South Africa and that it is developed markets that are leading investment into these regions.
 
“We are also seeing increasing interest and activity in the UK regarding co-location of battery storage facilities alongside solar and wind generation plants,” he adds. 
 

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