Mark Brisley: Frank great to have you with us today. Let's start with the fact that over the past 15 years or so, large pension funds have been increasing their exposure to infrastructure assets. Why is that?
Frank Latshaw: Great to be here, Mark. I believe the answer lies in three areas, the nature of pure infrastructure assets themselves, the secular decline in interest rates and inflation over the past four decades, and the aging demographics in society. These factors have led long-term-oriented pension fund managers to seek out alternative investments in areas like infrastructure.
With respect to interest rates and inflation, they may finally be rising out of a long period of being subdued by various secular forces. This is probably a good thing for real assets like infrastructure so long as we return to a level that is still relatively contained, even if elevated compared to the last 10 years. Based on everything I'm seeing, that's a reasonable expectation.
Similarly, aging demographic trends continue with people increasingly living longer. This is something retirement planners will likely need to consider. In terms of the attributes of infrastructure assets, they become increasingly important based on the scenario I've just described. They include highly visible stable cash flows over a long period of time and offer protection against inflation, be it through contractual means or by simply having pricing power because they're monopolistic and offer essential services.
There's also a lot of investment required in global infrastructure to meet the growing and changing needs of society, and given these businesses earn good returns on investment, the long-term growth outlook is quite strong. The pension funds have picked up on this and continue to allocate capital to alternative assets, and I suspect more advisors preparing clients for retirement will consider doing so too.
Mark: What are infrastructure investments and which ones are best suited to provide retirement income?
Frank: A proper definition of infrastructure would include those companies that provide essential services like renewable power and regulated electric and water utilities, as well as transportation infrastructure, such as toll roads and airports. While there will always be a GDP-sensitive component to our infrastructure portfolios in the form of transportation infrastructure, we are mostly positioned to capitalize on the steady long-term growth and income potential we're seeing in the renewable power and regulated utility sectors.
These sectors have historically been leaders in the steady dividend growth areas of the market, and now more than ever offer a long runway of growth and yield. This is due to the significant investment needed to build and repair old existing electric and water utility systems and develop new renewable power and storage solutions, as well as ensure we have a sustainable transmission grid, which are all necessary to meet the lofty climate change goals that have been set.
When I think of the road ahead for these sectors, I see a long path that steadily climbs at a measured pace for as far as the eye can see. This area of infrastructure offers longevity, stability, growth, and income to those who are entering a long retirement phase in their lives and need an investment with compatible duration and security.
Mark: Let's talk about why retirees need to consider infrastructure for income purposes in their portfolios.
Frank: It's really the stability of these businesses and the longevity and visibility of the future cash flows that offer added security to individuals entering retirement. The companies provide essential services like water, power, and transportation. They tend to be protected from a lot of competition, and we will most likely be relying on these services indefinitely in society. In an ever-changing world prone to technological advancement and disruption and changing social habits, this kind of stability during one's retirement years can be beneficial.
Mark: Frank, we know that markets can go up, and we know markets can go down. In the case of infrastructure, what happens to the income that these investments will provide if markets go down.
Frank: As we have witnessed through several business cycles, the variability of income depends on the type of infrastructure. With transportation infrastructure being the most cyclical, while renewables and regulated utilities being the least. Even those areas of infrastructure that have cyclicality have proven resilient eventually as the economy recovers. Ultimately, the infrastructure portfolios today are more weighted towards the more stable areas of renewables and utilities.
Bigger picture, our focus with infrastructure investing at dynamic is on quality being the hallmark of the equity income team and on secular growth, and typically not on cyclical value. This goal has always been to find the best-in-class infrastructure companies that offer the highest long-term compounding potential. Over the long term, this has produced steady, conservative yet healthy total returns and avoided material permanent losses of capital for our unitholders. We actively manage these types of exposures by always taking into consideration the outlook for the markets in the stage of the business cycle over any given near-term horizon.
Mark: Frank, let's close with how investors can add infrastructure assets to their portfolios.
Frank: Typically, whether it's infrastructure or any other real asset or alternative strategy. The first step is to make room in a portfolio that is already fully allocated to the conventional equity and fixed income classes. We can make the case that infrastructure can act either as a global equity diversifier or as a fixed income alternative. The cash flows of infrastructure companies are very steady and predictable, and the business is very defensive much like bonds. The long-term growth potential gives them more of an equity feel, although growth is on the conservative end.
For those entering retirement, it makes sense to consider a separate bucket for alternative investments. Within this new category, infrastructure can work quite nicely given its stability and long-term growth, and income potential. As you know, Mark, at Dynamic we offer a real asset solution which combines the benefits of both real estate and infrastructure together under one roof with the Dynamic Real Estate & Infrastructure Income II Fund.
Mark: Well, Frank, very much appreciate those insights. It was great to have you here today. Thank you.
Frank: Thanks very much, Mark.
