Welcome to Pathways, a Macquarie Asset Management podcast where we provide fresh perspectives and insights for institutional investors and consultants about real assets, private markets, and macroeconomics.
Daniel McCormack
Core infrastructure has delivered roughly 10% annualised since 2008, stronger than global equities, global corporate bonds, and government bonds, while drawing down in the GFC roughly like a bond, not equities. And as it turns out, the right amount of this to actually hold in a portfolio isn't what you'd expect. And we'll get into that a little bit later.
Hi everybody. My name's Daniel McCormack. I'm head of research at Macquarie Asset Management. And joining me today to talk about core infrastructure is Peter Bendall, our portfolio strategy lead for one of our core infrastructure funds. And he's going to help me unpack the latest Pathways paper that we've written on core infrastructure, as well as talk about the asset class in general.
So, there's three parts today. First, why core, why now? Second, the mechanics, so regulation, returns, sectors, all of that sort of detail. And then third, what this actually means for someone building a portfolio, and what allocation you should possibly look to have to core infrastructure. So, Pete, uh, welcome to the, to the Pathways podcast.
Peter Bendall
Thanks Daniel, great to be here.
Daniel McCormack
So, let's sort of dive straight in. Why should someone who already invests in infrastructure generally care about the core segment specifically and, and why should they care right now?
Peter Bendall
Look, I think, Daniel, when investors are thinking about investing in infrastructure, they need to ask themselves the question, why? If their allocation towards infrastructure is about trying to unlock infrastructure's defensive characteristics that can complement the rest of their portfolio, their equities, their bonds, um, then core really delivers that in the pure sense. So, with the macroeconomic environment that's demonstrating a lot more volatility recently than what we've seen over the past, you know, maybe 10 or so years ago, inflation's higher, interest rates are higher. We're seeing growing interest in the defensive characteristics that core infrastructure can bring to assist their portfolio.
Daniel McCormack
Thanks, Pete. And the word core gets used quite loosely. What actually is core infrastructure? Can you describe it for the listeners and, like, how does it differ from infrastructure more generally?
Peter Bendall
No, it's a good point. I think as an industry group, the definition of what is infrastructure and the breakdown of the different types of infrastructure still doesn't have a dictionary definition. You know, when I first started out in infrastructure, one of my first managers often referred to infrastructure as ranging between boring to slightly interesting. And from a core perspective we're really looking to be at the lower risk end of, of that spectrum we talk about core.
So, when we think about the types of things we're investing in, we think about the essential services that support everyday life, economic activities, that's turning your lights on, communicating with your family, driving to work. These are the stable brownfield operating assets that have a long track record that provides predictability around their operations. And they generally have a monopolistic position with relatively limited volume risk. They're therefore typically regulated. And or long-term contracted.
But you also need to think about core in the context of the jurisdiction in which it sits. So even if you have an asset that has those characteristics I just stepped through, you're also wanting to have them in a jurisdiction that's mature, stable and predictable. So, we generally target core assets in OECD style markets where there's established regulatory and legal frameworks.
And what are these things trying to deliver? They're really delivering that balanced mix of income and capital appreciation versus core plus where you may see more capital appreciation versus current income. You're generally going to see very strong inflation pass-throughs, so regulated and contracted models which generally have direct links to inflation. Whereas your core plus assets, maybe more an indirect protection due to its, uh, competitive position or barriers to entry. And we generally see low GDP sensitivity. So, through the economic cycles we're generally seeing core perform relatively stably.
And I think our definition of, of core as we think about it, I think it's broadly consistent with what we've seen in the market. So, for example, the MSCI Private Infrastructure benchmarks, and they define their low-risk infrastructure. This ticks into similar boxes. They're talking about regulated and long-term contracted, generally more than 10 years. A good mix of income and capital appreciation, as well as targeting mature markets. So, we think those, those definitions are generally accepted more broadly than just Macquarie's perspectives.
Daniel McCormack
Yeah, that all makes sense, Pete. And so, but why are investors doing core at the moment? Like, what is it about the asset class that at present they find particularly attractive?
Peter Bendall
For core infrastructure, I think generally investors have been going into this because of those defensive characteristics that enhance their portfolio diversification. So, it's kind of fundamentally as people are thinking about allocating to the space, that's kind of one of the first considerations they're looking at. And I think as noted in, in our core infrastructure paper, we've seen those benefits really come through over a long period of time. So, it's demonstrated resilient performance through the various cycles, delivering that 9.9% return since 2008, you know, even outpacing global equities that came in at 9.2% over that period. And doing that with that lower volatility we expect. So around 7.8% versus those global equities again at 17.4%. So that's providing that demonstrated performance, and as a result, we've seen it generally also outperforming other asset classes when you do have a higher inflation environment or generally outperforming when you're seeing GDP falling. So those characteristics that people are looking for in their portfolio certainly coming through in terms of its performance over a very long period of time relative to other asset classes. So, I think it's now proven out in terms of what it can deliver for a portfolio.
But then in terms of why today and why people potentially increasing their allocations in today's market, I think there's a number of things that are providing an opportunity to create upside for core infrastructure going forward. Firstly, from the macroeconomic perspective, we're seeing a more volatile macro environment on a go-forward basis. Um, as I mentioned before, inflation and interest rates are higher than what we have seen before. You know, if you think 5, 10 years ago we had the US was sitting around 1.8% inflation on average, Eurozone around 1.4%. Today those rates are 3.9 and 3.4% respectively. So, a significant change in terms of that profile. And you've seen inflation continually trend above central bank targets. So, the expectation of inflation staying high for longer has certainly become something that's front of mind for investors and therefore seeking out investments that have that inflation protection is becoming more interesting.
On top of that, you lay on the go-forward uncertainty in terms of markets, the geopolitical challenges we're seeing globally, energy security challenges, even the significant deployment of AI capital. And the inflationary pressures it's building, and what are its outcomes to productivity ultimately going to be. I think investors see core infrastructure as a way to hedge against those types of exposures.
Daniel McCormack
Yeah, it's a really good point you make, and this is something that we've discussed previously on the podcast and the MAM research team has been making, and that is we think we're in a different macroeconomic world now, one, it's, it's the kind of one you described where we're in a world where, courtesy of globalisation slowing down, maybe even going into reverse in some areas, courtesy of, deteriorating demographics, ageing populations, and some other factors, the supply side of the global economy is just growing more slowly, and that means that we have more inflation, uh, more inflationary pressure around and inflation has a different dynamic to what, to what it used to.
And we are in a more volatile world, right? So, there's going to be more policy volatility courtesy of, of more inflation. There's also more geopolitical volatility and all of that is going to translate into more economic volatility. And so infrastructure is well positioned, right, for that kind of world because it offers an inflation hedge, it offers defensiveness, but core particularly so because the inflation hedge aspect is stronger, the defensiveness is stronger. So, core infrastructure is sort of ideally suited, if you like, to the world we now find ourselves in.
So just shifting slightly, so, you know, infrastructure's a fairly young asset class, like, you know, relative to listed equities, listed bonds, even private real estate, private equity, it's fairly new. Like, how do you think about benchmarking? Does that sort of immaturity of the asset class influence the way people benchmark?
Peter Bendall
It's a really interesting point, Daniel, we continue to see this question raised by investors around the market. People often asking the question, how should I think about infrastructure benchmarking relative to the other investments they're making. And I think the maturity of the market and the depth of data we have around infrastructure is certainly a lot less than other sectors like real estate for example. And therefore, a lot of, you know, chief investment officers and their teams are really struggling to grasp, OK, how do I track the performance of my portfolio. I think what's generally resulted in is people looking at more nominal targets or CPI plus type targets versus necessarily a benchmark of other infrastructure performance in terms of tracking how their portfolio's going. But certainly, there's interest in understanding what's being built out, and I think as benchmarks like those brought out through our core paper, MSCI develops, people become more familiar in terms of what's incorporated in it, how it's functioning. I suspect there'll be significant appetite to pick those up alongside their CPI plus and nominal benchmarks they're currently using.
Daniel McCormack
Yeah, very interesting. So, let's now move into the sort of second section of our, of our podcast, if that's OK, and talk about the regulatory environment a bit. You've talked about this as being, you know, really important from a core point of view because many core assets do have a regulatory structure, uh, around them. So, can you just sort of talk through the mechanics of, of regulation and, and why from your perspective it's so important?
Peter Bendall
So yeah, so you're, you're right, Daniel, as I said earlier, for a lot of core infrastructure they really are in a monopolistic style position where they are the sole provider, whether it's your electric utility, your water utility, a monopoly registry concession. These types of businesses are generally going to require a level of economic regulation, given the pricing power of which they, they hold. Now the regulated models are very much built to deal with that challenge, i.e., you want the investor who has control of that company to effectively give up give up some of their pricing power. And in response receive consistency in terms of a rate of return on their invested capital.
So, this is a solution to a challenge around how do we manage these types of monopolistic style assets.
We're therefore really looking at understanding that relationship with that regulator, understanding how they've operated, how they react to certain situations and therefore, when we think about core infrastructure, we're certainly thinking about, entering into relationships with regulators who have proven that stability and predictability in terms of their regulatory commitment over the long period of time. So again, it goes back to those mature jurisdictions, that I mentioned before, those established regulatory frameworks, but also the legal frameworks to challenge the regulator and make sure that we keep that relationship stable.
Daniel McCormack
So, what has that meant in terms of how this has been implemented over time?
Peter Bendall
I think we've certainly seen regulation around for a very long time. This isn't a new concept. The regulatory models around our utilities, you know, started throughout the 20th century. It started up very much as, as an allowed rate of return on invested capital base, and then recovery of your invested capital through depreciation and a pass through of those operating costs of the business to earn effectively an appropriate fair return on that.
These traditional regulatory models are very backward looking, they'll look at what have you spent historically, what were your operating costs historically, to then set the go-forward revenues for the business on a go-forward basis. This model obviously has some challenges in terms of does the future represent the past and you've seen an evolution of the regulatory models. So you saw more incentive-based regulations start being rolled out in the 1980s, where you'll be setting a forward looking tariff model that would consider what does inflation look like, how more efficient should those businesses become, and effectively sets a ceiling in terms of what um investors can charge their customers, that incentivises more efficient operations, provides the investor ability to share in those um more efficient operations versus just being a straight pass of operating costs.
This is then evolved further to more performance-based regulation, so now you see regulators implementing specific KPIs, whether that's around network reliability, service quality, customer satisfaction, safety standards. These things are all set up to be able to incentivise the investor to drive performance of the businesses to meet the demands of the stakeholders beyond just the formulaic approach of the traditional regulatory structures.
These different models have moved at different speeds, um, around the world, so you'll definitely see the United States is predominantly more that traditional structure with, um, cost-based and asset base regulation, and you'll see more incentive-based regulation in markets like Australia and the UK. However, I wouldn't just call them black and white, there's definitely levels of grey, and when you're assessing your regulators, you really do need to go regulator by regulator, not all utilities are the same.
Daniel McCormack
It's fascinating, Pete, and that's, it's, it's an age-old economic problem, right, is, is how do we manage assets or industries that are kind of ideally suited to a monopoly structure, right? Like because if you just allow a monopoly to operate freely, of course, you know, the corporate or the owner of that asset will put up prices tremendously and capture all the economic rents. So, then it's, you know, then it's optimal to wrap some regulation around it, uh, so that, so that the communities and the consumers are benefiting, just as much as, as the owner of the assets. So really interesting sort of practical examples of, that, how that theoretical problem, is, is solved, and, you know, you're operating in this sort of, sort of everyday. It's interesting how it's evolved, right, and, and the incentives that, that you talk about.
And Pete, does that, does that mean that, like, your relationship with the regulator is important here? And, like, when you're owning these assets, is there sort of a, an ongoing dialogue with the regulator? Like, is, is there a good way to approach a regulator, is there a way to have a good relationship with a regulator, and is there a way to have, like, a, a bad relationship with the regulator, as in, you know, does that stuff matter, is it consequential, and kind of, like, what's, what's the good way to do it?
Peter Bendall
You're hitting on a really key consideration for core infrastructure. At the end of the day, we're providing an essential service to a local community. We need to understand what that community needs, what their objectives are.
You may choose to run your utility in a number of different ways. You may seek to invest heavily in new green generation that decarbonises the grid that you view as being quite positive in terms of the environmental impact, the long-term sustainability of those assets. If that results in significantly increased bills for your customer base, when the customer base is very much focused on affordability, they're happy or maybe comfortable continuing to use fossil fuels versus shift towards green investments, that creates a real challenge. You've made these investments, is the regulator going to grant you an appropriate rate of return for making those investments? And therefore, you need to be very much aligned with what are your stakeholders after, whether that's your customers, regulators, politicians or otherwise. So, you need to spend a lot of time with people on the ground in the markets in which you're investing to really understand what are the headwinds and tailwinds facing that utility. What is your community looking to achieve over the next 10, 20, 30 years, such that you can align your business plan and your underwriting case to those objectives.
If you're out of step with the regulator, it's never a comfortable situation when you're going in and asking for things like rate increases or recovery of your, of your investments. When buying and owning and operating regulated assets, it's just not a set and forget thing. You don't just buy the asset and, you know, come back in 10 years when, when you want to sell it.
Daniel McCormack
Because some people may think it's like that, right? Because it's regulated and you've got your rate of return. It sounds like it's not like that at all.
Peter Bendall
No, it's certainly an, an asset class where the sleeves need to be rolled up in terms of maintaining and managing those relationships. It's a very dynamic market as if you go in any scenario or any situation where you find yourself inter-, interacting with government stakeholders that may shift with political winds, that may shift with whatever their constituents are most concerned about, you need to be ready to be very responsive to that environment and not having those connections and relationships in place from the start, mean that when you have challenges, that maybe unpredictable might come up, it's very hard to turn up for the first time and introduce yourself and say, we need to have this problem solved, but at the same time introducing yourself. You need to establish those relationships, have those connections, such that you can build a partnership to work with those communities and regulators throughout the cycles.
Daniel McCormack
Yeah, a political strategist I know has always given me and the people he works with the advice of the first time you meet a politician, don't ask for something. Uh, it shouldn't be when you're asking for something. And, um, I guess it, you know, it's the same for regulators, right? You want to have the relationship first, so that when you do need to ask for something, or you do need to engage on a problem, you've already got a solid foundation of goodwill there.
And Pete, uh, let's, let's talk about sectors, like, what, what sectors do you like right now and which ones would you lean away from?
Peter Bendall
So, I think you have seen an evolution of the types of infrastructure that are best positioned for the ongoing go-forward returns to be delivered for a portfolio. So, as we think about allocating capital in today's market, as I mentioned before, the macroeconomic environment, the volatility we're seeing, we're certainly going more overweight towards sectors that have that more direct inflation pass-through or ability to move interest rates through to the underlying customers. So, actually, going along towards regulated utilities or monopoly government concessions where you have a specific inflation linked tariff, we think areas in today's macroeconomic environment should be a larger portion of a portfolio.
I think laying on top of that though, there are some really interesting thematics that are driving infrastructure today relative to maybe 5, 10 years ago.
For example, one area we're spending a lot more time on is around businesses that benefit from electrification. So, whether that's driven by digitalisation and the growing roll-out of data centres, AI and the requirements of energy to meet that, or whether it's due to decarbonisation, you know, the shift towards more green generation, electrification of the grid, more electric vehicles being rolled out. Or whether it's driven by deglobalisation, as you're seeing certain countries, particularly the US, you know, seeking to onshore critical industries and activities that in and of themselves require more energy to support them, all these factors are really driving demand for more energy, in particular more electrons. So, I think businesses that are well positioned to supply that to those end users, again regulated electric utilities for example, that sleepy part of the, the sector is now seeing significant growth opportunities cos it's really providing the generation, the poles and the wires to move those electrons through to those end customers who need it. So, you have an opportunity to benefit from growth in the market. All within obviously the framework of that regulated model in terms of providing the defensive characteristics.
I think areas that we may be more cautious on from a core infrastructure perspective is sectors where terminal value risk is now elevated. And we certainly think about that in certain midstream sectors where today you have very strong contracted assets with high EBITDA margins, all those good characteristics you generally seek, but the question you need to ask yourself is in 10 years from now, can I recontract that asset? Even if I can recontract it, who's the next institutional investor who's going to want to buy that asset from me? So, I'm not, not saying midstream is a bad sector to be allocating to, I'm just saying from a core perspective that risk profile needs to be assessed when spreading these types of opportunities.
Daniel McCormack
Yeah, understood. There's a price for everything, right? So even, you know, for the sort of worst assets, if you like, in inverted commas, if you get it at the right price, you can, you can get a good return, no doubt about it, and that's why, you know, bottom-up analysis is obviously absolutely crucial. But those are really interesting, interesting observations. Thanks for that, Pete.
Let's now go to the investor kind of aspect of this and sort of allocation and the like, and in the core infrastructure paper that you and Aizhan published, there's some great work in there on, on these questions. So, let's, let's just sort of go through some of that if that's all right. And, and one of the, the points that you both make is that core and core plus, people often look at them as substitutes, but you argue they're actually complementary, sort of with genuinely distinct risk-return profiles, and that's fascinating to me. Could you, could you walk me through that?
Peter Bendall
Yeah, and this kind of goes back to one of your opening questions Daniel, in terms of, like, why are investors coming into infrastructure? And what are they looking for in terms of the benefits that could provide to their portfolios. So, if we think about, optimising allocations between core and core plus, it may vary depending on what that appetite for that investor is.
So, for example an investor looking to kind of maximise their, their Sharpe ratio, probably leans the portfolio towards more core plus exposure, where you'll see core plus kind of at the 80% allocation, core at kind of the circa 20%. But then when you lay on top of that, you know, a consideration that's important to many investors, which is yield. If you add a yield constraint to that, that calculation, you certainly see core stepping up towards kind of a third, 35% of an appropriate allocation towards infrastructure.
And certainly for those investors who are looking for more of a foundational position in their portfolio, maybe they're looking to minimise volatility in their portfolio going forward, for many pension funds they might be well funded, perhaps overfunded and therefore it's much more about capital protection and capital growth, and in those situations, when you want to minimise volatility, you can see an allocation towards core that is much more closer to almost 100% in terms of taking those kind of foundational positions.
So, in terms of, um, investors' considerations of infrastructure in their broader portfolio and what should that allocation look like, again that'll vary depending on what that investor is looking to achieve. So, if an investor who's looking to kind of, um, maximise their, their Sharpe ratio, then an allocation towards core infrastructure actually moves up to kind of around that 13% of their portfolio, and that compares to, you know, US and global equities contributing, you know, circa around a third for that portfolio.
Similarly, from a minimising of volatility perspective, what you actually see play out in a, in a portfolio is a shift more towards corporate bonds, and, and credit and therefore you actually see core infrastructure step down to around an 8% allocation within the, the portfolio, but again still a meaningful allocation in terms of the overall portfolio construction to achieve either of those objectives.
Daniel McCormack
Yeah. Those are pretty sizeable allocations, really, right? You know, if we're thinking about sort of the size of infrastructure as a whole, like, you know, in the world, as, you know, its market cap relative to other asset classes and then core being a subcomponent of that, you know, those allocations you're talking about are quite high, and I'd, I'd imagine they're higher than what people are actually allocating. Um, so what are people actually allocating? Where are people at today?
Peter Bendall
Yeah, so I think as we think about infrastructure target allocations for institutional investors, we're seeing that still kind of in the mid-single digit, probably circa 6% at the moment in terms of their allocations to infrastructure and I think for the first time we're actually seeing a lot of those investors actually now achieving that target or even, even above their target, which is obviously pleasing. Um, but, uh, certainly from a maturity of the infrastructure space, it is still a growing area, and many investors still haven't made those initial infrastructure allocations.
And as we're seeing those shifts, I think as new, new investors come into the space, as I mentioned before, I think clients making their first allocation and looking for that foundational position and really getting the pure defensive characteristics the core infrastructure can bring, that does kind of lean them more towards that first foundational core allocation before they start building out into core plus value added and opportunistic.
So, in terms of, um, the investable markets of infrastructure, um, and the opportunities used to deploy capital across core, core plus, value add and opportunistic, we've seen data sets from, um, houses like Preqin, which suggest that core infrastructure has generally been sitting around 25% of total AUM in the infrastructure space. That's actually broadly consistent with what we've seen at, at Macquarie over the last few decades. So, if you think about the investable opportunity set within the infrastructure realm, you know, circa 25% of that is available in terms of allocations to core. So that obviously then creates a significant broader opportunity set across the rest of infrastructure and therefore as we think about people's long-term allocations to the space should they wish to be across the spectrum, again, you'd see core as a meaningful portion of that, but the investable set, circa 25%.
And I think that's not surprising given the types of assets that exist within core, these are our large, regulated utilities. There's not that many of them out there and therefore not surprising that they are a smaller component of the overall infrastructure market.
Daniel McCormack
And, and how are investors accessing core at the moment? So, what I'm asking here, Pete, is, the people for closed-end funds, open-end funds, what's the sort of situation with, with secondaries? I mean, I know the choice between open end and closed end, you know, it can be horses for courses. Some types of assets are better suited, suited to open end, right, some are better suited to, to closed end. But could you just talk about, talk about that for our listeners, please?
Peter Bendall
So, I think what we've seen generally is a shift towards core being um invested through more open-ended type structures. Why does that happen? I think one of the key drivers is these are very long dated, stable, predictable businesses, and as we just talked about, there aren't that many of them out there. So, when you've made an investment through a closed end structure, invested into a core infrastructure opportunity, maybe a nice stabilised regulated utility. That fund comes to its end of its life and you're forced to sell that asset. That requires you to then reallocate that capital and try and find another asset to replace that. And that isn't an easy exercise, in terms of redeploying capital. I think what we've seen over the last 10, 20 years, particularly as more capital's flown into the infrastructure space, it's been quite challenging to be able to then reallocate at equivalent attractive returns. So, there has been a shift towards more open-ended structures in terms of allocating to core.
Now I'm certainly not saying that over the life of that asset there isn't value to be driven and therefore we do think that there's opportunity with those strong regulatory relationships we discussed earlier or enhancing the operational performance of the businesses, you can then drive performance of a stabilised core infrastructure asset over the long time. Um, and that will vary versus what you'll be doing for a more core plus style asset.
What we generally think is that when you're investing in core plus, value-add type opportunities, you're generally trying to unlock some level of growth, transformation that you want to have discipline to deliver and then realise. So, we think there's still ongoing appetite for more that core plus opportunistic um infrastructure to sit in a closed end fund to maintain that discipline around driving value and realising it. Whereas for core infrastructure that longer-term investment of regulatory relationships, improving operational performance with a multi-decade type hat on is a more appropriate form for core.
Daniel McCormack
Got it. So just pulling all of this together. How would you summarise this for an allocator? Like, if someone's listening to this and they're an asset allocator, how would you summarise core's role in, in a portfolio?
Peter Bendall
So, I think as we think about core, if investors are thinking of shifting into a real assets allocation, and the objective of trying to achieve that is to reduce volatility within their portfolio, enhance their, their Sharpe ratios, then we think core really represents the purest infrastructure characteristics to achieve those objectives and allow that investor to diversify their portfolio.
In today's market, I think allocators have the opportunity to really invest in what is a modern vintage of core infrastructure. So, what is core today doesn't necessarily be the same as it was 20 years ago. As we talked about the macroeconomic environment today is different, so allocating towards those direct protections from inflation through those regulated structures or through, um, government monopoly concessions with inflation linkage, those assets really provide a much more robust defensive position against today's macroeconomic environment.
Similarly, when we're thinking about the thematics, whether it's digitalisation, decarbonisation, deglobalisation or demographics more broadly, investing behind or allocating towards um core assets that are really set up to benefit from those over the coming decades we think can best extract um strong performance to complement the defensive nature of the assets over the, uh, over the long-term.
Um, so we think as we reflect on the takeaways from the paper, we do believe core has demonstrated its performance over a very long period of time. It has really delivered on what it said it would do. And I think when investors are able to consider the macro environment and allocate, um, for today's environment, it really does position it to potentially continue to provide those characteristics that benefit those investors' portfolios on a go-forward basis.
Daniel McCormack
Yeah, that's, that's great. Pete, thank you. Um, we're coming around to time now, but we like to, uh, put our guests through a sort of quick fire round at the end of the podcast. So, this is where I ask you, uh, some quick questions and you sort of give a one-sentence, ideally, answer to it. And I've got a few questions here if you're, if you're game. Should we, should we go to that?
Peter Bendall
Love to, Daniel, let's bring it on.
Daniel McCormack
Alright. Biggest misconception about core infrastructure.
Peter Bendall
That core means boring. I think it's, it's predictable and it's been delivering, which is actually quite an exciting outcome.
Daniel McCormack
Core or core plus, which is the more interesting conversation in the market right now?
Peter Bendall
I think core plus has some really interesting flow opportunities in terms of what are the new growth um sectors to be allocating to at the moment. Whereas core just provides that foundational position in terms of discipline against volatility on a go-forward basis.
Daniel McCormack
You need both. And one thing that would change your mind about core's defensiveness?
Peter Bendall
Political interference or other unpredictability in terms of regulatory activity. We want to see predictability, stability through the cycles from our regulators to respect that contract we've entered into in terms of giving up our pricing power around these monopolistic style assets.
Daniel McCormack
Yeah, a really important point. And electrification or midstream five years from now, which, you know, which, which will have mattered more.
Peter Bendall
I think from a core perspective, I think the longer-term perspective around investing into electrification will definitely be the, the winner, um, in terms of that matchup.
Daniel McCormack
Got it. Pete, thank you very much. What I heard in, in today's podcast, we, we talked about infrastructure's, core infrastructure's traits. We talked about how it's an asset class very well suited to the current macroeconomic environment that we believe anyway that we're in. And if you as an investor think we're in a world where there's going to be a bit more economic volatility and a bit more underlying inflationary pressure around, we would certainly argue that an allocation to core infrastructure is going to be helpful.
We talked about regulation, which is fascinating. I never realised that, that, you know, the importance of that relationship with the regulator and the extent to which you need to engage, and of course you need to be engaged with the communities. You need to be making sure that, you know, the regulator is delivering on his or her objectives because that will obviously help with your relationship with them. I never quite realised how important that was, but that was interesting to draw out.
And then I think in terms of the allocations discussion, first, core infrastructure offers some diversification and it offers a really good risk-adjusted return. So, adding it to your portfolio is going to push out your frontier, all else being, all else being equal. And then, you know, if you're, if you're going for stability, like within, within the core space, it, it can be even more important within a broader portfolio context, maybe that you then start leaning, leaning a bit into bonds. And that difference in the allocation between, the sort of core only aspect of it, or, you know, the broader portfolio, I thought that was, that was really interesting as well.
So, great, thanks a lot, Pete. And, um, for listeners who want, want the full detail on this, you can go and read our paper, the link is in the show notes. And until next time on the Pathways podcast, thank you.
Disclosure
This recording is intended as general information for financial professionals and qualified investors only.
The views expressed in this podcast represent those of the speaker and are subject to change. Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy and does not constitute advice, an advertisement, an invitation, a confirmation, an offer, or solicitation to engage in any investment activity or an offer of any banking or financial service.
Investing involves risk, including the possible loss of principal. All examples herein are for illustrative purposes only, and there can be no assurance that any particular investment objective will be realized or any investment strategy seeking to achieve such objective will be successful.
Past performance is not a reliable indication of future performance. Before acting on any information, consider the appropriateness of it with regard to your particular objectives, financial situation and needs, and seek advice.
No representation or warranty expressed or implied is made as to the accuracy or completeness of the information, opinions, and conclusions presented. This recording may include forward looking statements. No representation is made or will be made that any forward-looking statements will be achieved or will prove to be correct, or that any assumptions on which statements may be based are reasonable.
In preparing this recording, reliance has been placed without independent verification on the accuracy and completeness of all information available from external sources.
Macquarie Asset Management, MAM, is the asset management division of Macquarie Group. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
Any Macquarie Group entity noted in this podcast is not an authorized deposit taking institution for the purposes of the Banking Act 1959. The obligations of these Macquarie Group entities do not represent deposits or other liabilities of Macquarie Bank.
Macquarie Bank does not guarantee or otherwise provide assurance in respect of the obligations of these other Macquarie Group entities.
In addition, if this podcast relates to an investment, the investor is subject to investment risk, including possible delays in repayment and loss of income and principal invested, and none of Macquarie Bank or any other Macquarie Group entity guarantees any particular rate of return on or the performance of the investment, nor do they guarantee repayment of capital in respect of the investment.