Page 10 - DIY Investor Magazine | Issue 37

NAVIGATING INFLATION WITH INFRASTRUCTURE ASSETS Apr 2023 10 BBGI’s availability style holdings offer strong protection against inflation...by David Kimberley DIY Investor Magazine · A simple way to gauge what people are concerned about is to browse search data on Google Trends - a free tool that lets you look at how often people are searching online for a given word or phrase in a specific country or across several. Unsurprisingly, searches for inflation related terms in the UK have increased markedly over the past 18 months; a notable example is the phrase ‘inflation investments’, which has surged in search volume. Those searches hint at a frustrating problem we face when confronted with inflation; it is not difficult to understand that prices are rising but it is hard to identify investments that offer meaningful protection. AVAILABILITY-STYLE ASSETS One asset class that may useful in this regard is ‘availability- style critical social infrastructure assets’ of the kind that BBGI Global Infrastructure (BBGI) invests in. These assets, which could include roads, bridges, schools or hospitals, are infrastructure assets the government has outsourced the construction and management of to a private company. The private company receives contractually defined revenues in return for its services, so long as the infrastructure is available for use – hence ‘availability-style’. BBGI’s co-CEOs Duncan Ball and Frank Schramm invest in government-backed availability- style assets around the world, all with contractual long-term income streams with genuine links to inflation. ‘IT IS NOT DIFFICULT TO UNDERSTAND THAT PRICES ARE RISING BUT IT IS HARD TO IDENTIFY INVESTMENTS THAT OFFER MEANINGFUL PROTECTION’ The trust has strong ESG credentials, building and managing critical infrastructure but still managing to deliver positive outcomes for all stakeholders, including shareholders, governments or the people using the infrastructure. INFLATION-LINKED CONTRACTS Duncan and Frank only invest in assets with government or government-backed contracts, in AAA or AA-rated countries. They have strong inflation-linked provisions, with payments tied partially or fully to inflation, like the RPI in the UK. The public-sector client commits to paying an availability fee including an explicit inflation pass-through, providing direct contracted inflation protection. In practice, this means BBGI has inflation-linked investments backed by counterparties with a high level of creditworthiness. BBGI mirrors these contracts with their own sub-contractors, who ensure that the assets BBGI holds remain functional. In a win-win for both sides, the subcontractors are appropriately compensated for their work and there is more certainty around keeping assets available, and BBGI has a hedge against price hikes so it is able to effectively manage its cost base. THE DANGERS OF DEMAND-BASED ASSETS It is true that similar provisions exist among other funds, but what makes BBGI unique is its exclusive focus on availability- style assets which provides direct contracted inflation protection, something that provides arguably the most crucial component of the trust’s ability to offer secure and attractive income protection. Revenue from these assets is consistent so long as they remain in use; if the managers invested in a road, as long as the road was available for use, they would be paid the same level of income – no matter how many people were actually using it.