Global listed infrastructure has become increasingly popular with investors who are looking to improve the resilience and diversification of their equity portfolio. This article examines investment case for infrastructure and also listed infrastructure specifically.
Firstly, let’s take a step back and look at why more and more investors are looking at allocating to infrastructure in general:
Stability
Infrastructure assets provide essential services to society, such utilities, oil and gas pipeline networks, communications and transportation infrastructure. These assets can offer stable and predictable cash flow supported by long term contracts or regulation, with monopolistic characteristics and high barriers to entry.
Yield
Global listed infrastructure also has offered an attractive income component as part of the overall total return historically. The asset class had traditionally offered higher yields than global equities. The current dividend yield spread is at 1.57% compared to the historical median of 1.40% [1]
Growth
The need for infrastructure investment is a never-ending cycle. Investment in infrastructure helps stimulate sustainable long-term economic growth. That growth then creates a need for further infrastructure. McKinsey forecasts that US$57 trillion investment is required in core infrastructure alone between 2012 and 2030 [2]. 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.
Now let’s focus on why the number of investors allocating to listed infrastructure has increased significantly over recent years. Global listed infrastructure is a relatively young asset class, but there is a growing recognition that the asset class delivers significant benefits to portfolios, such as:
Diversification
Investors can access a broad set of liquid investment opportunities across geographies and sectors that may not be available through direct investment. Regulatory frameworks and contracts’ structures vary greatly from sector to sector and from region to region, as they are based on and exposed to macro variables in different ways. Diversification can help mitigate risk in concentrated exposure to regional economic downturns and regulations.
Liquidity
Listed infrastructure companies offer liquid access to illiquid assets. According to Preqin, the dry powder from unlisted infrastructure funds is now at a record high at US$176 billion[3]. In contrast, the liquidity of listed infrastructure enables new allocations to be deployed with a high degree of efficiency
Valuation dislocation
In many instances, assets are co-owned by listed infrastructure companies and direct investors, and as a result, both should deliver similar returns in the long term.
Although listed and unlisted infrastructure assets with the same economic exposures will respond similarly to changes in the economic environment, valuation leads and lags do arise between both unlisted and listed infrastructure, and the volatility in daily pricing can create opportunities for an active listed infrastructure manager.
Recent macro and geopolitical events have caused an increase in volatility within the asset class. However, we believe that this has led to significant dislocations between fundamental value and prices which offers attractive medium and long-term investment opportunities.
The outlook for global listed infrastructure remains very positive, supported by robust economic activity and stable funding markets. We continue to see the potential for future outperformance as investors seek quality defensive assets that provide sustainable yield profiles in the current low interest rate environment.
[1] Past performance is not a reliable indicator of future performance. Source: AMP Capital, Bloomberg. Period: 31 January 2003 – 30 June 2018. Global Listed Infrastructure is represented by the Dow Jones Brookfield Global Infrastructure Index and Global Equities is represented by MSCI World AC Index.
[2] McKinsey Global Institute, 2013. Infrastructure Productivity: How to save $1 trillion a year. www.mckinsey.com/insights/engineering_construction/infrastructure_productivity
[3] Preqin online database. Data as at August 2018
Source: AMP Capital 18 October 2018
Author: Giuseppe Corona, Head of Global Listed Infrastructure
Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.
