Taking stock: listed infrastructure

Listed infrastructure no longer provides the returns it once did, but opportunities still exist, Lynn Strongin Dodds finds.

Listed infrastructure had a good run but overcrowding, plummeting oil prices, uncertainty over the Federal Reserve interest rate policy and volatile stock markets have tarnished the shine.

Globally, returns slid 6.7% last year and while this may offer a good entry point, investors are advised to not only build diversified portfolios on a sector basis but across geographies. Last year’s pipeline subsector, one of the largest components, is an example of why investors need to sift carefully through opportunities. The former investment darling plunged 36.1% in 2015, according to research from global investment firm Cohen & Steers. Drilling down, these companies were the hardest hit of the energy groups with the S&P MLP index, which tracks pipelines and their operators, plummeting 26% in 2015, compared with 19% for the S&P index that tracks oil exploration and production companies.
The downfall occurred as energy prices started their descent last year and energy producers slashed capital expenditure plans for 2016 prompting fears over slower pipeline volumes and reduced cash flows. The situation was further exacerbated by difficulties in accessing capital and balancing cash flows with refinancing needs and distribution expectations.
Other areas that took a battering include marine port firms that suffered a 12.3% decline on the back of slowing global trade as well as a sluggish Chinese
economy while freight rails, which are mainly based in North America, fell 10% due to reduced volumes for bulk commodities such as coal, crude oil and grains.
These negative results offset the healthy gains posted by airports, which boasted a 29.2% hike thanks to a robust tourist trade, as well as passenger railways – especially in Japan – which also benefited from increased traffic. Toll roads enjoyed a 18.9% jump as more people, especially in Europe, took to the highways,
taking advantage of lower oil prices and an economy lifted by quantitative easing.
Meanwhile water utilities (15.3%) led by US companies demonstrated resilient cash flows and reaffirmed capital expenditure programmes and the communications industry showed a 6.5% rise due to the solid earnings growth of wireless towers.
Despite the mixed picture, the overall demand remains strong for the sector based on emerging markets’ requirements for new infrastructure and developed countries’ need to bolster their existing foundations. “The expected return has come down from 8% in 2006 to around 6% now, but fundamentally we still like listed infrastructure because the underlying cash flows are predictable, it is less volatile than typical equities and the returns are superior to government bonds,” says Colin Dryburgh, investment manager in Kames Capital’s multi-asset team. “It also offers diversification and low correlation with equities and bonds because the fundamental risks of infrastructure are different from that of the business cycle.”
Bertrand Cliquet who manages the £700m Lazard Global Listed Infrastructure fund further adds: “If you look back to the global financial crisis, the earnings of MSCI World companies fell on average 53% while the earnings of the preferred infrastructure companies in our fund only fell by 3%. What makes infrastructure relevant is the longevity of the assets, the high predictability of earnings over long periods of time and the inflation hedge it provides.”
The preferred companies Cliquet
refers to are those that meet the fund’s specific criteria of revenue certainty, profitability and longevity. This translates into gas and electricity utilities as well as airports in North America and Europe that are monopolistic in nature with strong government contracts or are within a regulatory framework.