Saturday 20 July 2019

Infrastructure equities make sense now - and in longer term


'In turbulent times people will still use roads and airports and still consume the same levels of water and electricity.' Stock image
'In turbulent times people will still use roads and airports and still consume the same levels of water and electricity.' Stock image

William Heffernan

Infrastructure has many appealing qualities as an asset class and is one of the fastest growing alternative asset classes. It is broken up into two types - listed and unlisted. Listed is holding the equity of an underlying infrastructure company while unlisted is investing capital in the actual infrastructure asset ie private equity. In our opinion the former is far more preferable. An infrastructure asset is usually some form of economic infrastructure - a port or airport, toll road, mobile or electricity network. Additional categories include social infrastructure and renewable energy assets.

Infrastructure gives investors the defensive characteristics they need while also exposing them to cyclical trends likely to benefit from an upswing in economic growth. Infrastructure assets tend to have higher barriers to entry, inflation-linked revenue with easily mapped future cash flows. These cash flows are less cyclical due to the nature of the asset. In turbulent times people will still use roads and airports and still consume the same levels of water and electricity. The defensive case is further helped by the fact that infrastructure companies are traditionally less susceptible to the downside of a volatile markets.

From a growth perspective, these companies can also see some upside. As an economy improves these assets tend to see greater usage which drives revenue. One common perception is that infrastructure equities tend to underperform in a rising interest rate environment. This is driven by the notion that they act as a proxy to bond investment. They often pay an attractive dividend but can suffer as interest rates rise.

This notion also stems from the associated higher cost of funding and the view that infrastructure equities often come with high levels of debt. There is some truth to these notions, but in reality infrastructure firms are often well protected in the event of an inflation spike. Likewise, if real bond yields move up, most infrastructure firms have mechanisms that will result in price increases.

Lastly, any infrastructure company coming to the end of a capital expenditure cycle - with a strong balance sheet - will outperform due to previous fundraising at very attractive rates and the need for less funding going forward. The other major risk with this sector is political and regulatory interference. This can be mitigated by picking companies in countries with accountable institutions and a strong legal system for redress in the event of political interference.

As we move into a higher rate, higher inflation, more volatile environment, infrastructure equities begin to make sense. This has been evident over the past two months with the best-performing sectors being utilities, telecoms and real estate. Longer term this is also true.

Since 2002, the Dow Jones Brookfield Global Infrastructure Index has an annualised return of 11.92pc with the S&P500 returning 9.96pc a year over the same period. This was achieved with lower volatility as well. We believe it is beneficial to have some infrastructure exposure in portfolios at all times, even in exuberant bull markets. But its relative outperformance accelerates in moderate or bear markets. For investors looking to allocate to this sector there are multiple firms with strong fundamentals, attractive dividends and very capable management. There are also numerous ETFs and very good actively managed funds led by experienced sector specialists.

William Heffernan is senior research analyst with Cantor Fitzgerald (

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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