Building out infrastructure

As investors consider alternative assets to seek positive returns not offered by equities or fixed income, infrastructure is turning out to be a strong sector. 

Over the 12 months to 31 August,  2019, the ACS Equity–Infrastructure was second only to the ACS Property–Australia Listed sector for 12-month returns, according to FE Analytics.

The infrastructure sector returned 15.3% over the 12 months to 31 August, versus returns of just 3.5% over the same period in 2018. Not a single fund in the sector reported losses over the period. 

This compares to returns of 9% by the S&P ASX 200 and 5.1% by the ACS Equity–Australia sector, indicating investors were right to consider alternative assets away from domestic equities.

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For individual funds, returns were even more impressive with all but one of the 48 funds in the sector with a one-year track record returning double-digits. Furthermore, 11 of the funds returned more than 20%. 

The best-performing fund was the BlackRock Global Listed Infrastructure fund which returned 26.2% over the 12 months, up from 14.5% in the same period in 2018. The fund aims to achieve returns that exceed those of the S&P/UBS Global Infrastructure and Utility index over rolling three-year periods by investing in listed infrastructure securities. 

The only fund to invest in unlisted infrastructure within the sector was the IPIF Management Pty Infrastructure Partners Investment Core fund which provides access to unlisted infrastructure assets via specialist funds. These were the Utilities Trust of Australia, Global Diversified Infrastructure Fund Feeder Fund 2 and AMP Capital Diversified Infrastructure Trust funds. This fund had returned 5.3% over the year to 31 August, according to its most recent performance data.

Surprisingly, there were only three ETFs in the 52-strong sector, a low volume compared to other sectors, with the best-performing of these being the ETFS Global Core Infrastructure ETF which returned 18.5% over the period. Run by ETF Securities, this fund aims to provide exposure to the least volatile listed infrastructure companies selected from global exchanges. Its highest weighting is to the United States followed by Canada and Hong Kong. 

The majority of the funds featured covered global infrastructure with some specialising in specific regions such as RARE Emerging Markets which had 61% of its assets invested in Asia and returned 12.9% over the 12 months to 31 August, 2019. 

UK UTILITIES

One of the biggest developments in portfolio construction of infrastructure funds in recent months was the divide between managers on their views over UK utilities. 

RARE Infrastructure said it believed the UK utility sector was an undervalued opportunity while Magellan, which runs the Magellan Infrastructure Fund, said it was steering clear due to the threat of nationalisation from the UK Labour Party.

“We believe one area in which quality infrastructure companies are being undervalued is in UK utilities. Brexit, along with the UK Labour Party talks of nationalisation, has led to periodic, indiscriminate sell-offs. 

“National Grid is one such example. Two-thirds of the company’s revenue is generated from regulated utility businesses in the US. Despite this, the stock continues to be caught up in UK-centric sell-offs. This allows us to buy a quality, defensive stock, with strong, predictable, regulated cashflows at a discount,” RARE said.

Its RARE Infrastructure Income Fund (Hedged) holds UK utilities SSE, United Utilities and National Grid while National Grid was also the largest holding for the Lazard Global Listed Infrastructure fund at 8.2%, part of a total 21% UK allocation.

However, Gerald Stack at Magellan, only holds 1% allocated to the UK and said two of these UK stocks, United Utilities and Severn Trent, had detracted from recent performance. 

“The reduction in allocation to the water segments reflects our concerns over sovereign risk in the UK; specifically, the policy of the opposition Labour party to nationalise these utilities at significantly less than market value.

“We remain underweight the UK given the issues with UK utilities.”

This was the same for the Ausbil Global Essential Infrastructure fund which had 8.6% allocated to the UK but said this had been a drag on performance. 

In an update, it said: “Regionally, Europe performed the strongest, rising by just over 12%, whereas the UK posted a rise of under 2%, being held back by both Brexit concerns and also the spectre of re-nationalisation of the utilities under a potential (but increasingly unlikely, in our view) Corbyn-led Labour government.”