Why Invest in Global Listed Infrastructure?
Recent sharp falls in global equity markets underscore the benefits of diversifying investment exposure to more defensive asset classes. Offering stable, long-term returns, global listed infrastructure stocks can provide a ‘defensive layer’ to an investment portfolio and diversification benefits for investors heavily exposed to Australian shares. Here I answer some key questions about global listed infrastructure from an investment perspective, and outline the factors contributing to a positive outlook for the asset class.
What is infrastructure?
A diverse range of real or ‘hard’ assets critical to economic growth and the functioning of society. These assets fall into four broad categories: transportation (toll roads, ports, railways and airports); midstream energy (including pipelines and storage); utilities (including gas, electricity and water); and communications (such as wireless towers and satellites).
Why invest in infrastructure?
While infrastructure assets cover a broad range of industries, they have a number of shared characteristics which make them attractive to investors, including:
Stable and predictable cash flows: The essential service nature of infrastructure assets ensures demand is reasonably inelastic. In turn, this consistent demand generates stable and predictable cash flows, even in economic downturns.
High barriers to entry: Infrastructure assets are costly to build and difficult to replace. This reduces competition and creates monopolistic market positions and pricing power.
Inflation-linked pricing: Asset regulators generally take inflation into account when setting asset pricing structures. This means, as inflation rises, asset operators are often permitted to increase user fees.
What the benefits are of listed versus direct infrastructure investment?
Listed infrastructure companies own the same assets as unlisted private infrastructure owners, with the added benefits of exchange-traded stocks, such as transparency, daily pricing and liquidity. The listed infrastructure universe is highly liquid providing active investors with the flexibility to adjust portfolio positions as opportunities arise and conditions change. In contrast, direct infrastructure investments typically require significant capital commitment over the long-term.
The small minimum investments required to invest in infrastructure stocks provides investors with an effective way to create a highly diversified portfolio.
Why look overseas to invest in infrastructure?
Opportunities to invest in domestic listed infrastructure companies are very limited and highly concentrated. There are only about a dozen ASX-listed infrastructure companies which are predominantly focused on toll roads, utilities and airports. Furthermore, the three largest Australian infrastructure stocks account for approximately 60% of the $98 billion domestic listed infrastructure universe available to investors.
In contrast, there are around 350 listed infrastructure companies, across 16 countries globally. With a combined market capitalization of approximately $2.4 trillion, the global listed infrastructure universe is approximately double the size of Australia’s entire share market. In addition, offshore companies offer exposure to infrastructure asset categories not accessible directly through the ASX, including communication towers, satellites and water utilities.
Why infrastructure is considered a defensive investment?
Infrastructure assets’ fundamental characteristics, including their essential, long-term nature and inflation-linked pricing, translate into steady, long-term income streams through various economic cycles. A key feature of global listed infrastructure is its historically low correlation to broader equity markets. This can provide investors with downside protection which means in a falling market, the asset class falls by considerably less than general equities.
What are the diversification opportunities?
The global listed infrastructure universe is vast and highly diversified. It spans both emerging and developed markets and all asset types. As cash-strapped governments globally turn to the private sector to fund infrastructure, investors are gaining to access new assets across various markets. In contrast, Australia’s infrastructure sector is mature and new investment opportunities are limited.
What are the risks?
As with all general listed equity investments, there are risks investing in global listed infrastructure. The key areas of risk relevant to infrastructure assets are:
Regulation: Infrastructure assets are often heavily regulated because they play an essential economic and social role. Although regulators overseeing infrastructure assets usually take a reasonably predictable approach, political leaders may be less consistent, for example, confiscating economic returns from infrastructure businesses to generate public support. As a counterpoint, governments worldwide are heavily indebted, increasing their potential reliance on the private sector.
Interest rates: Infrastructure assets are capital-intensive which can make them sensitive to interest rate movements, although sensitivity varies across industry subsectors. Although infrastructure assets typically react negatively when interest rates rise, historical data shows after this initial impact, infrastructure companies recover as investors again focus on fundamentals.
How can these risks be mitigated?
Active portfolio management can play a critical role in mitigating these risks by reducing exposure to geographies and subsectors facing headwinds and deploying capital to other opportunities. Specialist infrastructure managers can also provide in-depth knowledge and on-the-ground insights into the regulatory and economic environment of individual countries and assets across the large infrastructure universe to help achieve stronger returns.
What is contributing to demand for private infrastructure investment?
Structural, rather than cyclical factors are driving the continued and increasing need for infrastructure investment globally.
Historic underinvestment and compelling demographic forces underpin the need for infrastructure spending across both developed and emerging markets. In fact, McKinsey Global Institute estimates that $3.7 trillion must be invested each year until 2035 to meet projected global economic and population growth. With stretched balance sheets, governments around the world are turning to the private sector to meet funding shortfalls.
What is the outlook for the asset class?
Although listed infrastructure is a popular and well-understood investment in Australia following numerous privatizations over many years, overseas investors are less familiar with the asset class. Attracted by stable and consistent cash-flows, individual investors, sovereign wealth funds and other institutions are increasing their allocations to this asset class. According to the Global Listed Infrastructure Organization, there are now over $85 billion of assets managed by specialist global listed infrastructure managers.
How can I invest in global listed infrastructure?
The simplest way to get diversified exposure to the asset class is through a specialist, managed global listed infrastructure fund.
Jason Beddow, Managing Director, Argo Global Listed Infrastructure (ASX: ALI)