This asset class may offer more to your clients than you think it can, says Colonial First State Global Asset Management head of global listed infrastructure, Peter Meany.
Myth 1: Listed infrastructure is highly correlated to equities
Infrastructure assets exhibit unique characteristics which have become increasingly relevant in the current economic environment. They provide essential goods or services to society, which have a low level of sensitivity to the economic cycle, using contracted or regulated price structures which provide an inflation hedge.
Global listed infrastructure assets tend to complement other typical constituents of an investment portfolio, meaning that allocating listed infrastructure assets to an investment portfolio improves its risk/return profile. Global listed infrastructure has delivered higher returns with lower risk than general equities over the last decade.
The sector has also proven to be defensive during periods of market volatility. In the last decade the sector has provided 90% of the upside in rising global equity markets but only 60% of the downside in falling markets.
Global listed infrastructure is suitable for investors who are looking for a more defensive investment during times of market volatility. In fact, over the last 20 years global listed infrastructure has delivered an annual compound return of 9% compared to 6% for global equities. Listed infrastructure may also suit investors who are concerned about the impact of inflation and want to ensure that their investments maintain and grow their value in real terms.
Myth 2: Infrastructure assets are low growth and will be left behind in rising markets
Infrastructure companies tend to generate growth from structural rather than cyclical drivers. Long-term trends like urban congestion, globalisation of trade, security of energy supplies, and mobility of communications have placed enormous strain on infrastructure networks and will require investment over many decades. Backed by the right business model, this investment should result in strong growth for investors.
A number of infrastructure sectors are currently delivering double-digit growth due to structural change. Mobile towers have been a beneficiary of the exponential growth in smart phone usage and the resulting pressures on mobile carriers to improve network quality. American Tower has been increasing rental charges, co-locating new tenants on existing sites and building or acquiring new sites. All up this equated to 11% compound growth in cash flows during a difficult period for the global economy. The rollout of 4G technology by tower customers means this trend is set to continue for at least another five years.