Australian investors have come to understand infrastructure as a long-term investment: it is a well-established asset class in its own right now.
Large-scale infrastructure assets, that provide essential services, can act as a stable, defensive, long-term cash flow generator, offering a high level of earnings certainty, and thus a consistent yield, with low correlation to other asset classes. Infrastructure can also act as an inherent inflation hedge, which protects the long-term purchasing power of invested funds.
Many infrastructure assets either have natural monopoly characteristics, where the economies of scale make it too difficult for competitors to replicate existing infrastructure (such as in airports or transmission lines), or actual legislated monopolies through contracts/concessions (such as an exclusive right to operate a toll-road).
The bright outlook for global infrastructure development is supported by a recent report by PwC predicting that by 2020, annual global infrastructure spending will reach $US5.3 trillion (currently, up from an estimated $US4.3 trillion in 2015.
Australian superannuation funds are big investors in infrastructure, usually as direct owners: the steady long-term cash flows from infrastructure make very good liability-matching assets for super funds.
Retail investors are well-served by the mini-sector of infrastructure funds listed on the Australian Securities Exchange (ASX). There are eight major infrastructure stocks, with a total market capitalisation of $72.6 billion. In that group are Transurban Group (TCL, $25 billion), Sydney Airport (SYD, $15.5 billion), APA Group (APA, $10.2 billion), DUET Group (DUE, $7.5 billion), AusNet Services (AST, $6.3 billion), Spark Infrastructure Group (SKI, $4.2 billion), Macquarie Atlas Roads Group (MQA, $3 billion) and Infigen Energy (IFN, $864 million).
But just as these stocks offer various infrastructure exposures, there is a large population of managed funds around the world that hold large portfolios of similar holdings – global listed infrastructure securities. This form of infrastructure investment suits retail investors, because it provides the liquidity that a fund owning direct holdings in infrastructure assets does not.
Australian investors looking for global listed infrastructure securities investments have a wide range of choice: this investment type is accessible through ASX-listed exchange-traded funds (ETFs) and at least one listed investment company (LIC), as well as managed funds traded through the ASX’s mFunds service, and unlisted funds carried on investment platforms (also available for direct investment). Some funds exist in all these forms.
The beauty of the ETF/LIC versions is the fact that they offer investors cost-effective, simple, instant and liquid exposure to portfolios of global infrastructure securities through buying one product, which is itself, a listed stock. That means investors can use the ETF/LICs to get market exposure very quickly and easily, instantly improving their portfolio’s diversification.
One of the best attributes this gives is that the investor can invest – and withdraw – any amount of money at any time, which is not true of the funds traded on the mFunds service, and unlisted funds. The ETFs also have very low management expense ratios (MERs), or annual management cost.
Here is a rundown of three infrastructure securities groupings: ETFs, the LIC and the mFunds.
Global listed infrastructure ETFs
AMP Capital Global Infrastructure Securities Fund (Unhedged) (ASX code GLIN, $2.79)
MER: 0.8% a year, with performance fee
GLIN is an active ETF that aims to generate income and capital growth over the long term, from a diversified portfolio of listed global infrastructure securities. The benchmark index is the Dow Jones Brookfield Global Infrastructure Net Accumulation Index, in A$ – but being an actively managed, GLIN will hold positions in stocks that differ greatly to their weighting in the index.
The ETF is a listed version of AMP Capital’s major global infrastructure securities fund. More than 60% of the portfolio investments are in North America, with Europe just over 20%, UK about 5%, Australasia about 4%, and the rest in Asia, Japan and Latin America. The dominant sector is oil and gas storage and transportation, which accounts for about 47% of the assets, followed by communications (22%), power transmission and distribution (9%) and water (7%). The rest is in tollroads, airports, ports and diversified assets.
The GLIN ETF has an inception date of 25 May 2016: at 30 April, had returned 8.72% after fees, compared to the benchmark return of 7.44%. Of that 8.72% return, 7.64% was growth and 1.07% was income.
Since its inception in 2010, the unlisted fund on which GLIN is based has delivered an average return of 13.9% a year, compared to the benchmark index return of 14.5% a year.
Being a global portfolio, the GLIN ETF will also pick up on the ASX-listed infrastructure stocks: local stock APA Group is its seventh-largest holding, at 3.3% of the portfolio.
VanEck Vectors FTSE Global Infrastructure (Hedged) ETF (IFRA, $19.83
MER: 0.52%
This ETF also invests in a diversified portfolio of global infrastructure securities, with a bias to developed markets. The IFRA ETF tracks the returns of the FTSE Developed Core Infrastructure 50/50 (Hedged into Australian Dollars) Index, which comprises securities in developed countries, which provide exposure to core infrastructure businesses, namely transportation, energy and telecommunications. The ASX-listed Transurban Group is the portfolio’s largest individual holding, at 5.1%.
The portfolio is 50.6% invested in the USA, 13.9% Europe, 10.4% Canada, 8.3% Australia, 4.9% Japan, 4.2% UK, 2.6% Hong Kong and 1.2% New Zealand. By sector the largest exposures are electricity utilities (27.2%), transportation infrastructure (23.9%) and multi-utilities (15.3%).
The inception date was 29 April 2016. Since inception the ETF has generated 13.8% a year, made up of 11.6% of price return and 2.2% income. The index has returned 14.4% a year.
Magellan Infrastructure Fund (Hedged) Exchange-Traded Managed Fund (MICH, $2.76)
MER: 1.05%, with performance fee
Magellan’s MICH fund is an exchange-traded managed fund (ETMF) that is a listed version of the Magellan Infrastructure Fund, one of the two global infrastructure securities funds rated ‘highly recommended’ by Zenith Investment Partners (the other is the Maple-Brown Abbott Global Listed Infrastructure Fund – Hedged Fund).
MICH benchmarks its performance against the S&P Global Infrastructure Index A$ Hedged Net Total Return index. Since inception in July 2016, the MICH fund has earned 6.9% a year, trailing its benchmark return of 8.2%. But for the six months to 30 April 2017, MICH was ahead of the benchmark, 9.7% to 9%.
The largest sector exposure is tollroads (16.5%), followed by airports (14.4%), communications (13.4%) and energy infrastructure (10%). The US hosts the largest exposure, at 27.3% of the portfolio, closely followed by Europe (26.5%). Aeroports de Paris is the largest stockholding.
There is a performance fee: Magellan claims 10% of the excess return above the higher of the Index Relative Hurdle (S&P Global Infrastructure Index A$ Hedged Net Total Return) and the “absolute return hurdle,” which is the yield of 10-year Australian government bonds). Additionally, the performance fee is subject to a high-water mark.
The ASX also hosts a global infrastructure securities listed investment company (LIC):
Argo Global Listed Infrastructure Fund (ALI, $1.84)
Management fee: 1% a year up to portfolio value of $500 million, then 1.1%
Listed in July 2015 at $2 a share, the ALI listed investment company (LIC) represents an actively managed, diversified portfolio of global listed infrastructure securities and assets. The ALI portfolio is managed by New York-based specialist real-assets fund manager, Cohen & Steers Capital Management, Inc.
The fund is 64.4% invested in North America, with the rest of the portfolio spread across Europe, Australia, Latin America, the UK, Japan and Asia. Electric power is the largest sectoral exposure, at 26.5%, and the portfolio is very well-diversified, including a 9.1% exposure to global infrastructure bonds (the fund can invest up to 20% in these assets.) Transurban Group is the ALI portfolio’s fourth largest holding, at 3.5% of the invested funds.
The ALI fund, which is unhedged, will try to beat its blended benchmark, which is 90% of the FTSE Global Core Infrastructure 50/50 Index – which covers developed and emerging markets – and 10% of the Merrill Lynch Fixed Rate Preferred Securities Index.
Since inception in July 2015, the ALI share price and net tangible asset (NTA) value of the portfolio have both under-performed the benchmark index and the S&P/ASX 200 accumulation index.
However, the unique selling point of LICs versus ETFs is that a LIC can trade below the NTA value of the portfolio: in fact, ALI is in this position at the moment, with the May NTA standing at $2.09 a share. Argo expects this gap to narrow as AGLI’s track record extends.
Managed funds through mFunds
mFunds are unlisted managed funds admitted for settlement under the ASX Operating Rules: although not listed on the ASX, mFunds are bought or sold through the ASX in a way that is similar to buying or selling shares.
Investors transacting in mFunds simply use their normal brokerage account: the mFund settlement service provides a straight through process (STP) to invest into a managed fund, removing the need for extensive paper work and potential errors and/or delays associated with completing forms.
Investors do not trade mFund units with other investors: they buy units from (and sell units to) the managed fund issuer’s unit registry, in a process facilitated by the ASX’s CHESS settlement system. The price of units is set by the fund manager and not on a traded market, as is the case in share transactions.
mFunds have certainly opened up greater possibilities for portfolio diversification, but their major drawback compared to ETFs and LICs is the minimum investment sizes: the reduced paperwork through mFunds should allow much lower minimum transactions compared to wrap platform providers, and some mFund issuers have done this, to $10,000 and even $5,000 in some cases (like the UBS Clarion Global Infrastructure Securities Fund below). But most mFunds still require about $20,000 to start with.
Infrastructure mFunds
AMP Capital Global Infrastructure Securities Unhedged
MER: 0.84% a year
The AMP Capital Global Infrastructure Securities Unhedged mFund represents the same portfolio as the GLIN ETF. Since inception in 2010, the fund has delivered an average return of 13.9% a year, compared to its benchmark index return of 14.5% a year. The minimum investment through mFunds is $10,000.
Alpha Infrastructure Fund
MER: 1.23% a year
The Alpha Infrastructure Fund aims to outperform (after fund fees and expenses, and before taxes) the S&P Global Infrastructure Total Return A$ Index, on a rolling three- to five-year basis. The fund is allocated between Magellan and Maple-Brown Abbott, the only two global listed infrastructure securities managers whose funds carry the ‘highly recommended’ rating from Australian research firm Zenith Investment Partners.
In the three years to April 30 2017, the Alpha Infrastructure Fund returned 9.9% a year, made up of 7.5% growth and 2.4% income. That lagged the fund’s benchmark, on 10.2%.
Even on the mFund service, the minimum initial investment in the Alpha Infrastructure Fund is $25,000, with a minimum additional investment of $10,000 and minimum withdrawal of $10,000.
RARE Infrastructure Value Fund – Hedged
MER: 1.02% a year, with performance fee
RARE Infrastructure Value Fund – Unhedged
MER: 0.97% a year, with performance fee
The RARE fund is an absolute return fund: it is benchmarked to the OECD G7 Inflation index, plus 5.5%, and it aims to exceed that combined number. RARE doesn’t want to compare its fund to a formal infrastructure index: it argues that because it narrows down the global infrastructure stocks into a 200-strong universe, then uses a very tight definition when choosing them, it shouldn’t be compared, instead it tries to target a real return of 5.5% above inflation.
The fund is highly concentrated: it usually holds between 30 to 60 stocks. Both forms of the fund have strong track records, although the unhedged version has performed better. Since inception in November 2006, the hedged RARE fund has returned 8.4% a year to 30 April 2017, compared to its benchmark on 7.1% a year; the unhedged version of the fund (inception May 2011) has generated 11.4% a year, versus 6.9% a year for its benchmark.
The fund will always be between 45% to 70% invested in regulated utilities (for example, energy and water) and will also hold between 55% to 75% of the portfolio in the developed markets. Greenfield projects – that is, new projects being built – will only represent a maximum of 20% of the portfolio at any time.
Western Europe is the largest geographical exposure, on 35%, closely followed by North America on 34%, with Asia-Pacific next on 17%. Electricity infrastructure heads the sector allocation, on 23%, with gas (21%) and rail (17%) also prominent. The largest stockholding is Groupe Eurotunnel, on 5.9%. ASX-listed infrastructure stocks Spark Infrastructure Group (4.9%) and APA Group (3.5%) are top 10 holdings.
The minimum investment is $20,000, whether direct, through a platform or through the mFund service.
Redpoint Global Infrastructure Fund
MER: 0.7% a year
Managed by Sydney-based boutique fund manager Redpoint, the Redpoint Global Infrastructure Fund is an actively managed global listed infrastructure funds, investing in 118 listed infrastructure companies out of 151 holdings in the benchmark.
Redpoint also blends ESG (environmental, social and governance) measures into its stock assessment, seeking a company ‘quality’ factor, and tries to overweight the portfolio towards stocks with higher, more sustainable yields. The Fund is fully hedged.
About 60% of the portfolio is North American infrastructure, with Europe 16.4%, Japan 8.5% and the UK 5.4%. Australian stocks make up 4% of the holdings.
The fund uses the FTSE Developed Core Infrastructure Index (A$) index as its benchmark: since inception in April 2012, the fund has earned 13.8% a year. The minimum investment is $20,000, whether direct, through a platform or the mFund service.
UBS Clarion Global Infrastructure Securities Fund
MER: 1% a year
The hedged UBS Clarion Global Infrastructure Securities Fund, managed by US-based property and infrastructure manager CBRE Clarion, is benchmarked to the FTSE Global Core Infrastructure 50/50 Index (Net) A$ Hedged, which it aims to beat over rolling three-year periods.
Since inception in August 2016, the fund has delivered a return of 7.9% a year, matching the benchmark. In the three months to April 2017, the UBS fund has gained the equivalent of 8.5% a year, versus 8.1% a year for the benchmark.
The portfolio is 56.6% invested in North America, with Europe (19.1%) and Australia/New Zealand (8.1%) the next largest allocations. Transurban and Sydney Airport are the second-largest and tenth-largest stockholdings.
The minimum initial investment is usually $20,000, but on the ASX mFund service, the minimum is $5,000.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.