Asset AllocationMarch 23, 2016

Infrastructure’s Brave New World

Long-term cash flows and attractive yields may be driving demand now, but investors may be exposing themselves to risks from new technological developments.

Reported by Featured Author

Apple Pay, Uber, drones, and driverless cars—these are just four of the emerging risks to your infrastructure portfolio.

Asset owners invested in this sector, or considering an allocation, should be aware of disruptive technologies that can fundamentally affect their holdings over the next 10, 20, or 30 years, according to research by Australian fund manager QIC.

“The pattern of change is gradual at first but ultimately expresses itself with explosive impact.”“Defining infrastructure by listing asset types including roads, airports, seaports, water, gas and electric utilities, hospitals, schools, and the like is limiting,” wrote Ross Israel, Albert Daniels, Caroline Nowacki, and Kirsten Whitehead of QIC’s infrastructure team. “Each of these could soon become outdated responses to social and business needs while also losing the attributes that make them attractive in portfolios.”

For example, autonomous vehicles—which QIC estimated could become widespread by the middle of this century—would potentially increase the capacity of roads as they would be able to drive more closely together. Parking needs would change dramatically as well, as urban centers would need fewer spaces.

Mobile payment services such as Apple Pay could dramatically change telecommunication networks, QIC reported, as operators’ roles “become increasingly blurred with that of financial institutions.”

Broader themes of automation and “big data” could also help infrastructure operators (and asset owners) operate more efficiently, the fund manager said. However, some existing assets may become obsolete as technology changes social behaviors.

Asset owners should incorporate analysis of emerging and disruptive technologies into their due diligence processes when considering new investments, QIC added, as well as testing how their existing holdings might be affected.

“As megatrends redefine modern living, a new perspective needs to be adopted,” the researchers wrote. “Megatrends are large, transformative global forces that define the future by having far-reaching impacts on businesses, economies, industries, societies, and individuals. The pattern of change is gradual at first but ultimately expresses itself with explosive impact.”