Inelastic demand
As an asset class, he says infrastructure is typically characterised by predictability rather than volatility – with predictable user demand, long-term growth and income over time. Broadly speaking, infrastructure enjoys a number of key characteristics, with many companies the sole providers of an essential product or service to a segment of the population for example. This means relatively inelastic demand, less sensitive to changes in price or the economic cycle compared with other products or services. Physical infrastructure assets also typically have long economically useful lives, with many operating under long-term concessions or contractual agreements. With significant capital usually required to develop such assets, this results in high barriers to entry for would-be competitors. Meanwhile, investors can benefit from fixed and regulated returns and inflation linkage. “Regulated market environments may bring access to predictable cashflows through government- backed regulation or long-term contracts,” says Frishberg. “The underlying revenue of infrastructure assets may also be linked to inflation, sometimes directly through a regulatory framework or a concession agreement linking price growth to inflation. “In short, infrastructure assets provide the foundation for an attractive investment because people need to use the products and services regardless of economic conditions.” For Macquarie, infrastructure is an under-researched area of global equity markets where various knowledge asymmetries exist. This means analysis by an experienced team can highlight opportunities for alpha and portfolios based on these, combined with risk management, should deliver attractive riskadjusted returns over time. “We seek stocks with strong infrastructure characteristics, good management and sound corporate governance and our analysts build a detailed financial model to value each company,” adds Frishberg. ”The portfolio predominantly comprises regulated/ contracted assets (subsectors such as electricity and gas transmission and distribution, pipelines, water and sewerage) and user demand transportation assets (such as airports, railways, seaports and toll roads). We also have selective exposure to integrated electric utilities and social infrastructure.” Due to its essential service nature, infra- structure is one of the less sensitive sectors to the economic cycle. Macquarie is expecting a low growth and low interest rate environment to persist globally for some time and the portfolio includes a combination of higher-yielding stocks and those with secular growth potential, as well as companies that will benefit from a gradual pick-up in economic growth.
Geographically diverse
Geographic exposure is well diversified across developed and emerging markets, with positions largely dictated by stockpicking. Frishberg notes ongoing caution towards continental Europe at present however, given the sovereign debt issues, heightened regulatory risk and expectation of weak growth for some years. “We believe a geographically diversified approach is attractive as it enables us to access the most attractive opportunities wherever they may be,” he adds. “We have been able to identify opportunities in 17 countries, with the largest current exposures in the US, France, Canada, the UK and China – although these are driven by stockpicking rather than top-down thematic calls.” At sector level, Frishberg remains cautious on electric utilities, where he says fundamentals are unfavourable, and his exposure has focused on regulated names with a higher level of earnings predictability. “Utilities in Europe are being squeezed by a combination of weak demand and increased renewable generation capacity, which weigh on electricity prices,” he adds. “Germany has added to its solar and wind generation capacity in recent years, which now stands at around 66 gigawatts (GW). To put this in some context, 66GW is over 40% more than Australia’s total generation capacity. “These companies are exposed to commodity prices and competitive electricity markets. Our underweight position has been beneficial over the last couple of years as share prices have significantly underperformed on the back of deteriorating fundamentals in Europe, the US and Japan.”
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