Infrastructure: Diversification Through Alternative Investments

Alternative investments may be used to diversify portfolios and protect them against volatility. Kim Parlee speaks with Jeff Tripp, Head of Alternative Investments at TD Asset Management, about the outlook for alternatives and opportunities in infrastructure.

Transcript

Kim Parlee: Let me start with just the reaction of the alternative investment world– and again, I know that’s a large world unto itself– to rising rates. Have you seen the appetite for that class of investments impacted by rising rates?

Jeff Tripp: Yeah, well, I don’t think any investible asset or class is immune from what’s happening around the world, whether it’s rising rates, inflation, geopolitical conflict, and volatility. Real assets are impacted, for sure. They move a little more slowly than the public markets and typically would lag public markets. And, of course, they react differently across asset class. So in the mortgage space, we’ve seen rising rates. So you can put money out in the current environment at pretty attractive interest rates. We’ve seen sharp increases in lending rates. On the real estate side, of course, we’ve seen some reduced liquidity in the market. That uncertainty makes it a little harder to value assets. And with rising interest rates, we do see a little pressure on yields, so cap rates and discount rates, which means you’ll see values coming down a little bit. The one area that we are seeing a lot of resilience is in infrastructure. There’s some macro themes, global macro themes that I think are providing really strong tailwinds to infra that will help it be a little more resilient through some of the volatility that we’re seeing right now.

Kim Parlee: Let’s dig into that. When you think about infrastructure, the class– and again, within that all sorts of different kinds of infrastructure. But I know the energy transition side of infrastructure is pretty interesting right now. So what are you seeing there?

Jeff Tripp: Yeah, well, that’s one of those things that I think will transcend cycles to some degree.

Kim Parlee: Like a structural change, you mean?

Jeff Tripp: Oh, for sure. And it’s much longer term. So we’re talking decades and decades and trillions of dollars of required investment to ultimately get us globally to the goals around decarbonization and electrification. So that’s the moving away from fossil fuels to electricity and then how that electricity is generated through renewable assets and projects, like wind and solar.

Kim Parlee: There seems to be, from what I’ve heard, too, a bit of a gap. I mean, we hear from everybody, I mean, the build has to happen. With this gap, it means it all has to be financed. It all has to be built. You mentioned trillions. I mean, just how fast is that gap being closed, I would ask?

Jeff Tripp: We’ve got a ways to go, I think. If you use the baseball analogy, it’s very early innings. And it’s going to require commitments from both the public and the private sector. That much we know. But you look at historically how power has been generated, whether it’s nuclear coal-fired plants all around the globe. And it’s so significant. And that baseload has to be replaced somehow. So it gives you an idea of just the monumental task of moving to renewables. And then you’ve got the increased demand on the electricity side, so just something as simple as EV vehicles, which are becoming more and more popular. You think about every house on every street in every city having an EV in their garage. Those cars need to be charged. So the demand is material. And I think where we see the opportunity in that is for investors that are looking to get into that space, there will be projects that need to be delivered to market. And there will need to be capital to fund those projects.

Kim Parlee: It’s funny, too, because we hear so much about, I’d say, battery materials. And we see that happen in the equity markets. But people are just thinking of that one little piece of it. There is everything else that goes into it, which is what you’re talking about, right?

Jeff Tripp: That’s right, yeah.

Kim Parlee: Infrastructure, I know there’s, again, lots of different classes. We talk about the energy transition. But you also have private infrastructure and real estate. You mentioned a few of them, too. But I know you manage the TD Greystone Real Asset Pooled Fund Trust.

Jeff Tripp: Mouthful.

Kim Parlee: TD GRAPFT. There you go. It’s better to say it that way. And as part of that, you’ve recently made an investment in a port in Europe. And I just thought you’d tell us a bit about it because I think this illustrates the kinds of things that you’re looking at.

Jeff Tripp: Yeah, we saw that as an opportunity to access some value in an asset class that wasn’t renewable. So it’s transportation and logistics. And renewables has been the focus, and rightly so, for all the reasons that we’ve just talked about. But what that has meant is that renewable assets, platforms, projects are in very high demand. And with that, yields have come down a bit.

Kim Parlee: Yeah, everybody wants it.

Jeff Tripp: Yeah. So where are you accessing compelling returns? We saw this port opportunity, which is continental Europe. It’s with a very strong operator that was in place. So we were able to buy into that asset with the existing operator. And it’s a diversifier for our program with increased exposure in Europe. The port investment itself was a new asset class for our platform. So that was quite compelling. And then the yield story– so we saw an opportunity to get some incremental yield over renewables. That’s not to say that renewables aren’t– renewables aren’t incredibly important or a big part of our program because they are. But the way we’ve built the program is that we have pretty material exposure to renewables. So that gave us the opportunity to diversify a bit.

Kim Parlee: Yeah. And this is a port to say, I’m assuming, just ships coming in and bringing stuff in?

Jeff Tripp: Ships, goods, dry goods, containers, that sort of thing. Yeah, with material storage. And we’ve got some– we’ve got some excess land that can be developed over time.

Kim Parlee: Interesting. I like the details. This is the fun stuff. I’ve only got about 30 seconds, but when you look out, obviously, for infra all this in general, I mean, you’re probably pretty optimistic and some of the opportunities as we go ahead.

Jeff Tripp: Short-term volatility, for sure. I think we would expect a bit of a challenging 2023. But it’s the long-term view of real assets. So what do they do for your portfolio? They’re a diversifier. They’ve got that risk-adjusted return story that I think is compelling versus a typical fixed-income and equity portfolio. And I do think that as we go through the cycle, there will continue to be demand for the drivers that we talked about with infrastructure. This is long term, decades and decades.

Kim Parlee: Yeah, and I’ve got 10 seconds here, just because one thing, too, people often– this is something that wasn’t always traditionally part of the mix, I think. But for institutional, it has been for a long time. So this is bringing the same ingredients that they work with at the same time.

Jeff Tripp: Very much so. And I think we’ve seen the evolution of asset or asset mixes for institutional investors. And I think individual investors can be thinking along those same terms. They can think about, what can real assets do for their portfolio?

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