Infrastructure: diversification through alternative investments

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

Transcription

Kim Parlee: Let me just start with the reaction of the alternative investing world, and again I know it’s a big world in itself, to the rate hike. Has the appetite for that class of investment been affected by the rate hike?

Jeff Trip: Yeah, well, I don’t think any asset or investment class is immune to what’s happening around the world, whether it’s rising rates, inflation, geopolitical conflicts, and volatility. Real assets are affected, for sure. They move a bit slower than the public markets and would generally lag in the public markets. And of course they react differently depending on the asset class. So in the mortgage space, we’ve seen rising rates. Therefore, you can invest money in the current environment at quite attractive interest rates. We have seen sharp increases in interest rates on loans. On the real estate side, of course, we have seen reduced liquidity in the market. That uncertainty makes it a bit more difficult to value assets. And with interest rates rising, we see a little bit of pressure on yields, so cap rates and discount rates, which means you’re going to see values ​​come down a little bit. The one area where we’re seeing a lot of resiliency is in infrastructure. There are some macro themes, global macro themes that I think are providing really strong tailwinds to the infrastructure that will help it be a little bit more resilient through the volatility that we’re seeing right now.

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

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Jeff Trip: 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 Trip: Sure. And it is much longer term. So we are talking about decades and decades and trillions of dollars of investment required to finally bring us globally to the decarbonization and electrification goals. That’s the switch from fossil fuels to electricity and then how that electricity is generated through renewable assets and projects, like wind and solar power.

Kim Parlee: There seems to be, from what I’ve heard, also, a small gap. I mean, we hear from everyone, I mean, the build has to happen. With this gap, it means that everything has to be financed. Everything has to be built. You mentioned trillions. I mean, how fast is that gap closing?

Jeff Trip: We have a long way to go, I think. If you use the baseball analogy, those are very early innings. And it will require commitments from both the public and private sectors. We know that. But you look historically at how power has been generated, whether it’s in coal-fired nuclear plants around the world. And it is so significant. And that base load has to be replaced somehow. So it gives you an idea of ​​the monumental task of moving to renewable energy. And then there is the increased demand on the electricity side, something as simple as electric vehicles, which are becoming increasingly popular. You think of every house on every street in every city that has an EV in its garage. Those cars need to be charged. So the demand is material. And I think where we see the opportunity is for investors looking to get into that space, there will be projects that need to be delivered to the market. And there will have to be capital to finance those projects.

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Kim Parlee: It’s also fun, because we hear a lot about, I would say, drum materials. And we see that happening in the stock markets. But people are only thinking about that small part. There’s everything else involved, which is what you’re talking about, right?

Jeff Trip: That’s the way it is.

Kim Parlee: Infrastructure, I know there are, again, many different classes. We are talking about the energy transition. But you also have private and real estate infrastructure. You also mentioned some of them. But I know you manage the TD Greystone Real Asset Pooled Fund.

Jeff Trip: Bite.

Kim Parlee: TD GRAPFT. There you go. It’s better to put it that way. And as part of that, it recently made an investment in a port in Europe. And I thought you’d tell us a little bit about it because I think this illustrates the kind of thing that you’re seeing.

Jeff Trip: Yes, we saw that as an opportunity to access some value in an asset class that was non-renewable. So it’s transportation and logistics. And renewable energy has been the focus, and rightly so, for all the reasons we just talked about. But what that has meant is that renewable assets, platforms and projects are in very high demand. And with that, yields are down a bit.

Kim Parlee: Yes, everyone wants it.

Jeff Trip: Yes. So where are you accessing attractive returns? We saw this port opportunity, which is continental Europe. It is with a very strong operator who was in his place. So we were able to buy that asset with the existing operator. And it is a diversifier for our program with greater exposure in Europe. The port investment itself was a new asset class for our platform. So that was pretty convincing. And then the yield story, so we saw an opportunity to get incremental return on renewables. That does not mean that renewable energies are not. Renewables aren’t incredibly important or a big part of our agenda because they are. But the way we’ve built the program is that we have quite a material exposure to renewables. That gave us the opportunity to branch out a bit.

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Kim Parlee: Yes. And this is a port to say, I guess, just ships that come in and bring stuff?

Jeff Trip: Ships, cargo, dry goods, containers, that sort of thing. Yes, with material storage. And we have something… we have excess land that can be developed over time.

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

Jeff Trip: Short-term volatility, sure. I think we would expect a bit of a challenging 2023. But it is the long-term view of real assets. So what do they do for your wallet? They are a diversifier. They have that risk-adjusted return story that I think is compelling compared to a typical fixed income and equity portfolio. And I think as we go through the cycle, there will continue to be demand for the controllers that we talked about with the 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 brings the same ingredients that they work with at the same time.

Jeff Trip: Much. And I think we’ve seen the evolution of assets or asset mixes for institutional investors. And I think individual investors can think in the same terms. You may think, what can real assets do for your portfolio?

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