By Jonathan Reyes
With sovereign yields just off all-time lows and global monetary conditions remaining loose, investors 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 assets comprise utilities, communication, transportation, energy and social infrastructure among others. They are often built or regulated in such a way that they face little or no competition and have their profits guaranteed by long-term contracts or regulation. Returns also tend to be relatively predictable over time regardless of the economic or business cycle. This provides extremely good visibility for revenues, cash flows and ultimately dividends.
The Dow Jones Brookfield Global Infrastructure index, a proxy for global infrastructure equities, has delivered a cumulative return of 270% during the past decade, almost 100% 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.
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 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 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.
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 a portfolio manager at AMP Capital
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