Listed infrastructure - renaissance of an asset class
For investors wanting a healthy mix of yield and stability, listed infrastructure could be the way to go, writes Jonathan Reyes.
With sovereign yields just off all-time lows and global monetary conditions remaining loose, investors around the globe continue to look at ways to increase their allocations to higher-returning assets such as equities.
However, many don’t want to take on too much market risk too quickly. Accordingly, rather than the traditional allocation to local or global equity markets, many are seeking alternative investments.
Listed infrastructure is one such alternative. It combines the consistent-yielding income and capital stability offered by direct infrastructure assets with the growth of equities markets.
Infrastructure assets are increasingly attracting attention from institutional and retail investors alike. These investors like infrastructure’s benefits of consistent income yield, greater capital stability and inflation-protection aspects. Infrastructure assets are often built or regulated in such a way that they face little or no competition.
They often have their profits guaranteed by long-term contracts or regulation and returns tend to be relatively predictable over time, regardless of the economic or business cycle. For investors, this provides extremely good visibility for revenues, cash flows and ultimately dividends.
These infrastructure assets comprise utilities, communication, transportation, energy and social infrastructure among others.
Many have been funded directly by major investors. Others have been listed on stock markets, making them, and their benefits, more accessible and liquid to a wider range of investors.
This is one reason why infrastructure securities have grown from a total market capitalisation of US$595 billion in 2002 to more than $2.3 trillion today.
The Dow Jones Brookfield Global Infrastructure Index, a proxy for global infrastructure equities, has delivered a cumulative return of 270 per cent during the past decade, almost 100 per cent higher than return by S&P Global Equities Index. Given that listed infrastructure has performed well in recent years, does that mean that investors have missed the opportunity?
I don’t believe so; rather, the expectation is the market will continue to grow.
Consider how the listed real estate market has grown from a small niche opportunity in the 1960s to a stand-alone asset class today.
The early years of the US real estate investment trust (REIT) market showed strong performance and many investors would likely have been questioning the future opportunity and potentially missed a rewarding investment opportunity over the next 50 years (See Graph 1).
At AMP Capital, we believe that listed infrastructure as an asset class is at the same place where US REITs was in its development in the mid - to - late 1980s.
Part of the reason for this belief in listed infrastructure’s nascence is the growing interest from institutional investors. Many large pension funds from countries such as Canada, America, Australia and the UK are now looking at listed infrastructure as a distinct asset class.
These funds are searching for investment opportunities that offer a combination of higher returns, stability and also inflation protection, all of which are characteristics of listed infrastructure. They also like listed infrastructure’s capability for asset liability matching and so are allocating to infrastructure securities from both bonds and equities.
Investors who have a high allocation to bonds see listed infrastructure as an ideal low-risk first step into the equity waters while investors who have a high allocation to equities see it as a low-beta alternative in their equity portfolios.
Portfolios can also be customised with the characteristics that give individual investors the best opportunity to achieve their goals.
For retail investors, listed infrastructure funds offer investors the ability to access the asset class with daily liquidity. It is a good fit for investors who are seeking sustainable income and capital growth as well as access to a broad range of regions and sectors to provide diversification to their investment portfolios.
Just because listed infrastructure is an asset class that has performed well does not mean that it is overvalued or that investors have “missed it”.
Global listed infrastructure has provided higher returns with lower risk than a number of asset classes and we believe infrastructure equities are likely to continue to be an attractive investment for long-term investors.
In addition, there are emerging investment opportunities particularly in sectors such as water, communications and transmission and distribution sectors. These sectors are expected to play a greater role in listed infrastructure growth during the coming years.
Jonathan Reyes is the global listed infrastructure portfolio manager at AMP Capital.
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