The case for listed infrastructure
Not a clear-cut definition…The definition of infrastructure is often a source of discussion. Infrastructure in its broadest sense can include companies that utilize the infrastructure but do not necessarily own, manage or operate it. On the other hand, the “pure-play” infrastructure companies derive the bulk of their operating income from managing/operating the asset. We believe that the characteristics (and attractiveness) of the sector are only visible with a narrow definition.
The limited competition and regulation of infrastructure assets result in relatively stable income streams, regardless of the economic cycle, and good visibility on earnings. The assets, often with inflation-linked contracts, benefit from high barriers to entry and relatively inelastic demand.
… For a separate asset class which definitely improves risk / returnInfrastructure has been one of the best performing asset classes since 2003, based on the GPR Pure Infra index. The search for yield has driven share prices in recent years, underpinned by transactional evidence in the direct market. However, infrastructure also outperformed general equities and property in an economic upturn and in the financial crisis. Due to the superior risk-return characteristics (Sharpe Ratio of 0.6), adding infrastructure to a well-diversified portfolio improves the efficient frontier significantly.
The correlation with general equities and property remains relatively high at 0.7, which is partly explained by the overlap in certain stocks, the larger share of passive investors and macroeconomic events. In addition, the negative correlation to bond yields since the financial crisis explains part of the repricing of infrastructure stocks.
Listed, unlisted or both?
Although infrastructure has been privately owned for centuries, privatization has only gained pace in western European countries since the 1980s, pioneered by the UK. The growth in Assets under Management of unlisted infrastructure investors has accelerated over the last decade. The same trend has been visible in the listed market with a growing number of companies. The ‘wall of money’ has intensified competition for core infrastructure assets as investment opportunities are limited.
Infrastructure is still a relatively new asset class for listed and unlisted investors alike, but the sector is gaining acceptance as a real asset class. Despite its strong performance, it still offers an attractive investment opportunity in a fast-growing market. The development of the property market, and especially the REIT market since the 1980s, is a good example of the potential of the listed infrastructure market.
Investors have to decide on their preferred way of gaining exposure to the sector - listed or unlisted. However, in our view, the one does not exclude the other. Here again, the comparison with property provides some useful insight: dual allocation is common among property investors as the listed market offers liquidity, a diversified global exposure and public-market corporate governance standards. In the meantime, volatility is arguably lower in the short term in the direct market as returns are smoothed and the listed market tends to overshoot in bear/bull markets. Yet, the characteristics of both should converge over a longer period.
Even if we start at the last peak in 2007 and include the financial downturn, listed infrastructure reported a 6.5% CAGR total return vs. 8.0% of direct investments. If we lengthen the sample, the 2004-16 12% CAGR total return of listed infrastructure outperforms the 10% of direct infra funds (after costs).
Kempen & Co Infrastructure Research
Kempen has a dedicated infrastructure research team based in Amsterdam. The focus is on listed European infrastructure, including airports, ports, toll roads and communication towers. We are still expanding the product and growing our coverage list – consisting of 20 stocks currently. If you would like to know more about the sector, or specific stocks, please connect at Linkedin, or contact me at Thomas.vanderMeij@kempen.com or +31 20 348 8496.
This article was originally posted on LinkedIn.
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