July-August 2017

INFRASTRUCTURE: Cashing in on planes, trains and automobiles

MapInfrastructure offers high yields and a hedge against inflation but it’s not easy for retail investors to access the asset class, writes Catherine Lafferty.

These are sunny times for the infrastructure sector. Politicians from Trump through Merkel to UK opposition leader Jeremy Corbyn are pledging to spend big money on its maintenance and upgrading. Positive attitudes to the asset class are reflected in the figures for investment in global infrastructure, which rose by 14% in 2016.

The McKinsey Global Institute estimates the need for infrastructure investment will cost $57 trillion (€50 trillion) over the next 15 years. Relative to other asset classes, the infrastructure sector has visible growth characteristics, given a need to invest heavily in it – not just in developing economies, but also in developed economies where a creaking infrastructure needs to be replaced.

There are clear paths to returns in infrastructure businesses, so it’s no surprise that this is an asset class much liked by pension schemes.

Antoine Lesné, who heads research and strategy for State Street’s SPDR ETFs, ticks off a list of attractions. Infrastructure is a long-term play on illiquidity; offers a stable flow of income; and has potential for a project to add value on completion by being sold. Also, it is attractive to investors from a yield standpoint, with yields currently at an average of 4%. A direct infrastructure project is a long-duration asset and can be indexed against inflation.

The sector is characterised by monopolies and high barriers to entry. Together with inelastic demand for infrastructure companies’ basic services, this makes for steady, frequently inflation-indexed revenue streams. Even in economic downturns, stable demand helps provide some protection to infrastructure businesses.

Ben Morton, portfolio manager for Cohen & Steers’ infrastructure portfolios, points out that some investors view global listed infrastructure (GLI) as a more interest rate-sensitive asset class. He says: “We have found that while [it] does tend to underperform global equities during periods of rising treasury yields, listed infrastructure companies generally outperform global equities by a significant margin in the six and 12-month periods that follow.”

Private burden
For all that politicians promise to spend on infrastructure, it is expected that private investors will increasingly step in to provide the necessary finance.

Wilson Magee, director of Franklin Templeton Investments’ global real estate and infrastructure securities team, says: “There are significant needs for infrastructure capital investment around the globe. In the US, there are limited opportunities for government to take on more of a spending burden. I have always believed since the election that whatever state governments and federal government does, a substantial burden would be borne by private investment.” Indeed, Morningstar recently created a standalone global listed infrastructure category in response to the growing acceptance of infrastructure as an asset class.

Amanda Rebello, Deutsche Asset Management head of ETF distribution for the UK and Ireland, says: “As an industry, we see that the provision of infrastructure as a government responsibility has shifted over the decades and that infrastructure has gained recognition as a distinctive asset class holding considerable appeal for investors.”

But infrastructure investment has its snags. Fund structures, decision-making processes and the way capital moves between funds and investors are more difficult than with traditional liquid investments. During strong bull markets, infrastructure stocks may also rise less sharply than other stocks (though they can be defensive assets when markets take a downward turn).

The real downside, though, is that given the nature of infrastructure-linked assets, they can be difficult to access. Lesné at SPDR describes the direct infrastructure market as  “often a private club, with entrance by invitation only”, adding that it is not really an asset class for smaller investors.

That said, a number of vehicles – such as unlisted private equity funds and listed investment trusts – afford ordinary investors the opportunity to squeeze past the door and into this exclusive club.

Lesné points out that such investment trusts are mainly found in the UK and often trade at a premium or a discount. “If they trade at a premium, they make yields less attractive and infrastructure is often sought for yield,” he says.

“That is why investors would want it in their portfolio but in reality, it is difficult to get the access.”

Mutual funds are another route into the asset class, but since they are often mostly equity funds investing in infrastructure company stocks, they tend not to have direct access to an infrastructure project.

Franklin Templeton’s global real estate and infrastructure securities, whose strategy was launched four years ago, offers retail mutual funds, which Magee says is one of the easiest and best ways to get exposure. Magee invests in listed infrastructure. The problem with private investment in infrastructure assets is that the deals are quite large, he says, meaning an investor might need $10 million to get into a fund – although with mutual funds, entry can be as low as $1,000.

Another way of gaining exposure is with ETFs, usually focused on equities related to infrastructure.

Lesné says an ETF is also convenient for larger investors, as it can house committed but uncalled capital. The structure of an ETF, with low capital requirements and high diversification and liquidity, is a further benefit.

There is not much diversification within the underlying index, however. Depending on the index, between 30 and 100 stocks typically represent the the entire infrastructure market.

SPDR has launched ETFs buying both infrastructure equities and bonds. The reason the strategy invests in bonds, Lesné says, is because “we need exposure to corporations in the infrastructure sector. Infrastructure in general is less volatile and has better ability to weather downturns in the market. These are the qualities which investors find attractive hence, both equities and bonds”.

A growing number of global listed infrastructure products are available for investors in a several regions, says Cohen & Steers’ Morton. The category includes a variety of both active and passive GLI products accessible to the ordinary investor. In most regions, active and passive products exist that have low minimum investment thresholds.

The assets under management of GLI products in the wealth management channel have grown significantly as their popularity has grown among the investment community. The overall market size of both passive and active products with dedicated GLI mandates in the wealth channel grew from $3.6 billion in March 2012 to $16 billion through March 2017.

The infrastructure universe has expanded rapidly amid elevated investor interest and calls for capital investment in infrastructure worldwide.

Actively managed GLI investment products far outnumber passives. In Europe, Cohen & Steers offers the Sicav Global Listed Infrastructure Fund at a low minimum. It takes a diversified approach to investing in the GLI universe, investing in owners and operators of critical infrastructure assets with predictable cash flows across a range of sectors and regions.

Similar products and vehicles are available in the US and across the globe. But as Morton stresses, it is important for potential investors to do their own research before investing in passive GLI products, as the underlying portfolio exposure across industries can vary. Some product allocation may be more energy or utility-related and some may lack allocation to sectors such as wireless towers and railways.

Caveats aside, the picture overall looks bright. Sinking money into infrastructure is an investment in the future – and, if its advocates are right, may indeed turn out to be the investment of the future.

©2017 funds europe