Few megatrends are as compelling as infrastructure. Up to US$40 trillion of infrastructure investment will be needed worldwide over two decades, predicts research firm Preqin.
Population growth is driving the infrastructure boom. An expected 1.7 billion extra people on the planet by 2040 will need new transport, energy and social infrastructure. Also, growth in middle-class incomes in emerging nations is fuelling new or upgraded infrastructure. As diets change and more people must be fed, trillions of investment dollars will be needed to upgrade agriculture-supply infrastructure in developing nations.
As another 2 billion Asians join the middle class by 2030, on OECD forecasts, consumption patterns will change. For example, middle-class consumers travelling overseas for the first time – an incredible tailwind for the region’s airport infrastructure.
Climate change and technology are other drivers. Governments in developed nations are spending more on power networks to address energy-grid resilience. And new cell-towers and other telecommunications infrastructure is needed to support the digital economy.
As infrastructure-project supply increases, investment demand is increasing. Giant overseas pension funds and some Australian superannuation funds have increased their exposure to infrastructure, private equity and other alternative assets. Institutional investors are collectively “underweight” their target allocation in infrastructure, notes Preqin.
I could go on with other trends supporting global infrastructure and unprecedented investment in this asset by 2040. And why infrastructure should be a portfolio mainstay.
But my interest in global infrastructure is more defensive than offensive. Investors can be swept up by hot trends and forget that infrastructure investment should be boring and defensive. Chosen well, infrastructure should reliably produce higher single-digit returns over time.
Leading investors such as Magellan Financial Group aim to deliver a return of 5% plus the inflation rate in their infrastructure fund through the cycle. That roughly equates to a total return of about 8% annually over long periods – attractive given the risk profile.
Infrastructure’s attractions
I like global infrastructure for five reasons. First, the asset is useful to build a “late-cycle” portfolio. If you believe the global equities bull market is nearing its final stages, as I do, make your portfolio defensive. That means reducing equities exposure and adding cash (as I have outlined recently for this Report) and other defensive assets such as infrastructure.
Second, global infrastructure is a portfolio diversifier. The asset has a lower correlation with equities. Simply, if share markets fall, listed infrastructure stocks will on average fall less, and vice versa. That’s because toll roads will keep earning income as cars use them and electricity utilities will keep churning out profits as people need power.
The third factor is global infrastructure’s prospects. Long-term investors such as Self-Managed Superannuation Funds should expose portfolios to megatrends and seek assets that provide reliable returns and have an attractive risk-return profile.
Fourth, Australia has some terrific infrastructure fund managers. They do not get the credit they deserve for turning this country into a global powerhouse in infrastructure investing. I’m surprised we haven’t heard more about global infrastructure funds given their returns.
The big risk for global infrastructure is rising interest rates. The “bond proxy” stocks are popular when rates are falling and typically underperform when they rise. Infrastructure companies usually have higher debt and rising rates reduce the present value of their future cash flows. Also, as rates rise, infrastructure yield becomes relatively less attractive.
I do not see global interest rates rising in a hurry from here. If anything, US interest rates are likelier to be cut. Australian interest rates were cut again this week and the market expects another cut later this year. Global infrastructure should continue to outperform in that interest-rate environment, but a larger-than-expected rise in rates would dent returns.
As to portfolio allocations, 5% in infrastructure seems reasonable for a balanced portfolio, possibly higher if you want to lift the defensive profile. Every investor is different, so do you own research or seek advice before determining your infrastructure allocation.
Invest globally: Australia has only a handful of large listed infrastructure companies. Focus on funds that invest in listed rather than unlisted infrastructure and have higher liquidity. Choose unhedged currency exposure because the Australian dollar will edge lower this year.
Most of all, have an investment time frame of at least seven years, preferably longer. Global infrastructure is a long-term portfolio asset, not one for speculators or those seeking double-digit returns every year.
Caveats aside, here are 5 top global infrastructure funds* for retail investors to consider:
1. Maple-Brown Abbott Global Listed Infrastructure Fund (unhedged)
The star infrastructure fund has delivered an annualised return of 15.4% since inception in December 2012 – or more than double its benchmark index.
Infrastructure investors should ideally look for longer fund history: as a long-term asset, you should assess funds over 10 years and include the 2008-09 Global Financial Crisis. But Maple-Brown Abbott has an excellent reputation in infrastructure and investing generally.
The fund’s returns are even more impressive given that it focuses on lower-risk assets such as regulated, contracted and concession assets. The fund aims to return 5.5% plus the inflation rate over rolling five-year periods.
2. Magellan Infrastructure Fund (ASX: MICH)
A consistent top performer, the fund returned 15.3% annually over 10 years and 8.8% since inception in July 2007. The one-year return is almost 15%.
I like Magellan’s approach: it excludes assets that have competition, commodity or sovereign risk. The fund’s “downside capture” over five years was zero. When global equities fell in a month, the fund’s value was unchanged, on average.
The fund also substantially hedges its currency exposure, reducing the risk of adverse currency movements. The Magellan fund and others like it may not produce the same high returns in the next five years in a rising rate environment, but it’s hard to go past this fund for investors seeking long-term conservative global infrastructure exposure.
3. Lazard Global Listed Infrastructure Fund
The $1.5-billion fund has an average return of 16.6% over 10 years and has consistently outperformed its bench market index over long periods.
Lazard favours monopoly-like infrastructure assets that are usually government-regulated and have reliable earnings streams. Almost 80% of the fund is invested in toll roads and water, gas, electricity and other diversified utilities – mostly in Europe and the United Kingdom.
The fund has delivered a higher total return than US equities (the S&P 500) over 10 years at far lower risk.
4. RARE Infrastructure Value Fund – unhedged
The fund’s return is 10.9% since inception in 2011. Over 12 months, the return is 17.4%, or 10.6 percentage points above its benchmark index.
Almost half the fund is invested in US and Canadian infrastructure assets and a third in Europe. Electricity, gas and water utilities dominate the fund by sector. The fund held 35 infrastructure stocks at May 2019 with an average market capitalisation of $41 billion.
RARE specialises in infrastructure investment and has one of this market’s largest research teams in that asset. Like other managers on this list, RARE favours conservative infrastructure assets and seeks consistent absolute, inflation-linked return over long periods.
5. Vanguard Global Infrastructure Index ETF (ASX: VBLD)
Exchange Traded Funds are another way to gain exposure to global infrastructure. Like other ETFs, VBLD is bought and sold on ASX like a share and provides low-cost index exposure. A management fee of 49 basis points is considerably less than active infrastructure funds.
VBLD seeks to track the return of the FTSE Developed Core Infrastructure Index, which comprises 144 stocks in developed markets. Launched in October 2018, the ETF has a six-month gross return of 14.3%.
I prefer active management funds to ETFs for infrastructure exposure at this point in the cycle. As big turning points in the global interest-rate cycle emerge in the next few years, and as equity market risks rise, it pays to have professional managers running the fund. You don’t want the index return in a bear market and have to sell.
Also, infrastructure indices often include companies that own growth assets, including in emerging markets, that would not meet conservative infrastructure definitions, meaning there may be more risk in an ETF than is apparent.
Investors who can hold their investment for 10-plus years might be happy with the index return and lower fees than infrastructure funds. But the active global infrastructure managers mentioned earlier have more than earned their fees.
Chart 1: Vanguard Global Infrastructure ETF (VBLD)
Source: Google
*performance figures to 31 May 2019
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 3 July 2019.
