Allocating to global listed infrastructure requires practitioners to fully understand what they are investing in.

Infrastructure assets have always played an important part in bringing a degree of resilience, liquidity and diversification to an investment portfolio. But given much of the current uncertainty in global markets, should planners be rethinking their approach to global listed infrastructure?

“Not at all,” says Maple-Brown Abbott portfolio manager, Global Listed Infrastructure, Steven Kempler. He views global infrastructure as taking on the qualities of both debt and equity, sitting somewhere between the two in terms of volatility and returns.

“Our analysis has shown that a permanent allocation to infrastructure, in a diversified portfolio, could help to not only improve portfolio income, but the less than perfect correlations with other asset classes means that an allocation, however small, may have a positive impact on reducing overall portfolio volatility,” he says.

It’s a view supported by Simon Wotherspoon CFP^® – a director and principal adviser of 2018 FPA Professional Practice of the Year, Wotherspoon Wealth.

“We think global infrastructure is a valuable portfolio diversifier, with low correlations to wider equity markets,” Wotherspoon says. “Infrastructure involves assets with a stable and predictable demand for services, regardless of the market cycle. This results in consistent earnings when most industries face increased risk from competition and disruption.”

Wotherspoon believes that amid the technological disruption faced by many industries, the fundamental drivers of infrastructure persist. These include increasing demand for airports and toll roads around the world, the continued explosion in the demand for wireless data – requiring more telecommunication infrastructure – and governments increasingly focused on improving grid reliability, congestion and the replacement of ageing infrastructure for water, gas and electricity networks.

According to AMP Capital head of Global Listed Infrastructure, Giuseppe Corona, the need for infrastructure investment is in a never-ending cycle, with investment in infrastructure helping to stimulate sustainable long-term economic growth, which then creates a need for further infrastructure.

“McKinsey forecasts that US$57 trillion investment is required in core infrastructure alone between 2012 and 2030. Heavily indebted governments can’t afford to spend that money themselves. Listed infrastructure companies must be part of the solution to fund this shortfall and are well positioned to benefit from attractive investment opportunities,” he says.

The good and bad

Like all asset classes, Wotherspoon says there are definite advantages and disadvantages of investing in global infrastructure that practitioners should be aware of. As for the pros, Wotherspoon points to the reliable long-term investment returns of listed infrastructure, with most infrastructure assets typically facing constant demand and limited competition.

He also likes the stability that this asset class can provide: “Listed infrastructure can provide downside protection, because assets with reliable earnings growth and stable income streams offer greater stability in declining markets.

“Listed infrastructure also adds diversification to a portfolio, with low correlations and typically low beta, while providing inflation protection, because infrastructure assets typically have long-term contracts with earnings linked to inflation.”

However, Wotherspoon adds that practitioners need to be mindful that listed infrastructure is generally viewed as a bond proxy, due to the interest rate sensitivity of this asset class, which means it can be volatile at key turning points in interest-rate expectations.

“For now, inflation worldwide is mostly muted, rates have never been so low, yet the prospect of a jump in rates of inflation or interest seems unlikely,” Wotherspoon says. “However, if rates rise in the short-term, a shock effect would cause infrastructure prices to be sold off in the short-term. But most infrastructure companies are locking in long-term debt at record low rates, so this may mute their cost of rising rates.”

Kempler agrees, saying interest rate sensitivity is often discussed as both a pro and a con, with most investors viewing falling rates as a pro and rising rates as a con for this asset class.

“However, over longer investment horizons, different infrastructure assets can behave very differently and provide quite varied return outcomes, depending on movements in rates – whether nominal or real – and what part of the curve is shifting, and whether or not companies pass-through these rate movements via regulatory frameworks or otherwise,” he says.

Wotherspoon also cautions that as this asset class is global, listed infrastructure does create currency risk, which can either work for or against investors. But looking at the Aussie dollar, he adds that it is near its long-term average against the U.S. and other trading partners of Australia, so the risk might prove moderate, but is nonetheless something to be mindful of.

“Listed global infrastructure has already had a strong run. If rates stay relatively low, then listed infrastructure still seems good value,” he says.

Considerations

Wotherspoon believes that any allocation to global listed infrastructure first requires planners to fully understand what they are investing in.

“Not all infrastructure is the same and it’s important to invest in the infrastructure, rather than the commodity for which that infrastructure caters.”

As an example, Wotherspoon says that when investing in pipelines, the returns for that investment should relate to the ‘rent’ for that pipeline and not the price of oil or gas at any point in time.

And what about hedged versus unhedged when it comes to investing in this asset class?

“In relation to hedged versus unhedged, it may be best to invest in global infrastructure without the issue of currency fluctuations. So, a hedged option is worth considering, though the Aussie dollar may yet track lower,” Wotherspoon says.

It’s a view supported by Kempler, who says when allocating to global listed infrastructure, planners should first consider what is lacking from their clients’ portfolios and then only allocate once they fully understand what they are investing in.

“Global listed infrastructure is different from many other asset classes, as it can provide benefits in the form of ‘inflation-linked’ income, reduced correlations with global equities and general downside protection,” he says.

“Whilst a target allocation is an individual decision for every investor, we believe an allocation to global listed infrastructure could provide positive risk-return levels to a portfolio compared to one without.”

Opportunities

So, where are the best investment opportunities for investors? For Maple-Brown Abbott, it invests in core infrastructure assets that possess high barriers to entry and which have strong strategic positions.

“We are optimistic around the long-term attractiveness of the infrastructure sector as an investment, including the ongoing increase in demand for long-dated, stable income streams, as well as the growing need for further infrastructure investment and the role that the private sector will play in this,” Kempler says.

Specifically, he sees attractively priced investment opportunities in European infrastructure assets, particularly with the likes of toll roads and airports. He also continues to be attracted to some long-haul North American pipeline assets, particularly on the natural gas networks.

“There is long-term demand for U.S. natural gas, as a result of switching from coal to gas, increasing household penetration by regulated gas utilities, and from the growing position the U.S. market has for LNG exports.”

And when it comes to his best high conviction position for this asset class, Kempler recommends Getlink – the owner and operator of the Channel tunnel connection between England and France.

“This continues to be our largest holding,” he says. “This is an irreplaceable, strategically positioned asset with a concession to operate through to 2086, and with significant growth potential, which we do not believe to be reflected in the share price.”

According to Kempler, this growth potential comes from new business opportunities, like Eurostar city connections, such as the newly launched London-Amsterdam service, or with more freight services switching to rail. Other growth opportunities for Getlink include using its existing infrastructure for other initiatives, such as connecting the U.K. and French power grids and selling that capacity to market participants.

“Getlink is a keenly sought after asset and despite the strong performance over the last 12 months, we still see the company as being attractively valued and well positioned,” Kempler says.