Infrastructure
Infrastructure assets often benefit from inelastic demand and enjoy contracts that specifically grant them an ability to earn a defined return on investment. Sometimes these also include mechanisms to adjust their revenues for factors such as inflation. As such, they can be considered income-producing assets and can be used to diversify balanced investment portfolios.
It is possible to gain exposure to infrastructure assets via individual equities, collective investments or buying individual infrastructure assets outright. Each has their own benefits, but I generally access the asset class via investment funds that use asset-selection processes to identify and invest in individual assets with superior profiles, while building diversified portfolios that exhibit lower overall risk than their individual parts.
Structured notes
Structured notes are investments where returns depend on the performance of an underlying asset, often a market index, over a set period. They are generally considered long-term investments and have the potential to provide fixed returns if their underlying index declines, while some structures also offer equity-like returns if markets rise. Structured notes incorporate an element of capital protection, with the holder potentially receiving all the initial invested capital at maturity even if markets have fallen heavily.
Generally issued by a counterparty, usually an investment bank, structured notes can be customised to provide the exposure the purchaser desires. They can facilitate highly tailored risk-return objectives. There are various types, including ‘synthetic zeros’ and ‘autocalls’. The main difference between these two is that synthetic zeros always redeem at the end of their term, while autocalls have the possibility of redeeming early – usually depending on the level of an underlying index on a set annual date.
Structured notes offer a unique way to diversify balanced investment portfolios given the challenges facing fixed income markets.
The following is an example of a structured note's return profile describing, just for illustrative purposes, the workings of a notional defensive autocall with the following features:
- An autocall coupon of 8%.
- Barrier drops of 7.5%.
- Capital protection set at a barrier of 50%.
- A maximum term of five years.
- Each level taken on an exact date each year after inception.
This example uses an underlying index starting point of 7,000. If the index is greater than or equal to its starting point of 7,000 at the end of year one, the autocall will terminate and the holder will receive their initial investment plus the autocall coupon of 8 per cent. If the index has fallen, the holder will continue to hold the autocall for another year.
If, at the end of the second year, the Index is greater than or equal to 6,475 (7,000 minus the barrier drop of 7.5 per cent), the holder will receive their initial investment plus the autocall coupon of 8 per cent interest for two years.
If the autocall has not expired before the maturity date (the maximum term of five years after its issue date), then one of two things will happen:
