Safe haven with bright prospects

10 min read 17 Nov 22

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested. Past performance is not a guide to future performance.

It’s been a perfect storm. Listed infrastructure has provided a rare safe haven in a turbulent year for financial markets, where equities and bonds alike have been battered by the new realities of rampant inflation, higher interest rates and the prospect of a recession. Listed infrastructure’s defensive qualities, combined with the ability to offer inflation protection by way of index-linked revenue and structural cashflow growth, have provided comfort in these tempestuous times. But we strongly believe that listed infrastructure offers compelling attributes long after the storm clouds have dispersed. We are steadfast in our belief that listed infrastructure may provide an ideal solution, not only for the here and now, but for many years to come.

Listed infrastructure’s defensive characteristics, endorsed by the critical nature of the underlying assets, are widely acknowledged. We rely on infrastructure throughout the course of our daily lives, regardless of the economic situation. The reliable and growing cashflows generated by infrastructure assets, the backbone of the global economy, can provide resilience in uncertain times as well as diversification benefits for investors’ portfolios.

But we strongly believe that listed infrastructure can offer more than just defensiveness; it is an asset class blessed with multiple growth avenues. Inflation provides many listed infrastructure companies, whether directly or indirectly, with a vital source of growth, which is particularly pertinent in the current environment. But inflation is not the only source of growth. Listed infrastructure is a beneficiary of long-term structural trends, such as renewable energy, digital connectivity and demographics – powerful themes which we believe will endure for many decades to come.

Rather than being a benefit, inflation has been cited as a potential risk for listed infrastructure and we would agree that strategies consisting mainly of bond proxies may struggle in an environment of rising rates and higher bond yields. Bond proxies, with no growth and high yields, are by their very nature more susceptible to the market’s capricious views on interest rates.

By contrast, we expect the long-term effects for a growth-focused strategy to be considerably different. With the asset class exposed to a variety of powerful tailwinds, we advocate a modern approach to listed infrastructure which focuses on beneficiaries of long-term growth and invests beyond the traditional realm of utilities, energy infrastructure and transport, to incorporate social infrastructure, which includes facilities for health, education and civic services, as well as evolving infrastructure which supports our increasingly digital economy. Dividend growth in excess of G7 inflation seems an attainable target, in our view, with average annual increases in the region of 5-10% over the long term.

Listed infrastructure can offer benefits beyond a financial context, in our view. From a societal perspective, we see infrastructure as uniquely positioned to provide long-term solutions for the pressing issue of energy security. The geopolitical situation arising from Russia’s military intervention in Ukraine has highlighted Europe’s heavy reliance on Russian gas, and the consequent surge in gas prices has underscored the importance of not just alternative sources of supply, but alternative sources of energy.

We strongly believe that natural gas has a pivotal role to play as a key transition fuel in the displacement of coal to combat climate change, but it is also abundantly clear that renewables provide a more sustainable source of power generation over the long term. Infrastructure is front and centre of the long journey towards net zero carbon, a view endorsed by the United Nations.

“This is a moment of unprecedented opportunity for infrastructure to shape the sustainable development of our planet, driven by the urgency of the climate crisis”

Infrastructure for climate action, United Nations Office for Project Services (UNOPS), 2021

Power generation from traditional energy sources attracts plenty of scrutiny as a significant contributor of greenhouse gas emissions, but the flipside of this conundrum is that infrastructure is critical to solving the current predicament: utilities have a huge role to play in the energy transition by reducing carbon emissions and increasing renewables within the energy mix.

The attractions of infrastructure, particularly in the listed sphere, have not gone unnoticed. We have seen increasing corporate activity across the asset class, with many listed infrastructure companies – from transition companies in utilities (ContourGlobal), to airports in transport (Sydney Airport), to data centres in digital infrastructure (CoreSite) – receiving takeover bids. We believe that these symbolic events provide a clear indication that the reliable and growing cashflows from infrastructure assets are going cheap in the stockmarket. Investors with a long-term time horizon, such as those in the private sphere, are starting to take notice and act on their convictions.

In the current environment where valuation has re-emerged as a key determinant of investment returns, the increased volatility in the stockmarket is presenting buying opportunities, in our view. The indiscriminate selloff in the real estate sector, driven by perceived interest-rate sensitivity, has provided attractive entry points for listed infrastructure companies structured as real estate investment trusts (REITs).

Our two new purchases this year both stem from the real estate sector: Segro, based here in the UK, provides our first foray into e-commerce infrastructure, while Alexandria Real Estate, a US REIT, provides access to life science infrastructure, the critical assets behind the research and development of drugs to address society’s ongoing medical needs. Both companies benefit from powerful structural trends, which we believe will support continued growth over the long term. We remain as optimistic as ever about the long-term growth opportunities in listed infrastructure.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

Please note that the fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

Further risks associated with this fund can be found in the fund’s Key Investor Information Document

By Alex Araujo

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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