How can listed infrastructure offer inflation protection?

3 min read 11 Apr 23

Alex Araujo, an international equity portfolio manager at M&G and specialist in listed infrastructure companies.  

Our investment strategy aims to boost investors’ returns to derive greater value from their capital and to protect them from inflation.

My work as a manager addresses a dual objective: beat the global equity market and raise investors’ dividend income each year. It is based on the principle that investor income must rise faster than inflation, in order to protect our clients in all circumstances and in particular during inflationary spirals, like the one we are going through, which seems to be persistent.

We are indeed proud of the returns we have distributed since the launch of this strategy, five years ago: a cumulated gain greater than real rate of inflation.

Steady growth in cash flows

This makes my philosophy similar to that of Stuart Rhodes, my long-time friend and M&G colleague, who has built a solid strategy based on the dividend driver. What makes us different is that I focus on infrastructure companies shares. Infrastructure can provide inflation protection with the right stocks, those whose cash flows rise steadily.

Three categories of infrastructures can meet these expectations, each in its own way. The first category consists of utilities, energy and transport infrastructure. The second is social infrastructure, such as hospitals, schools, libraries, public services and police stations, which may be owned by private capital in some countries, such as the US and the UK. And the third category is what we call evolving infrastructure, high-growth companies that provide the digital services of the new economy through mobile phone towers, datacentres, fibre-optic networks, payment services, etc. 

Pricing power

Utilities offer several layers of protection. In transport infrastructure, toll highways, to take one example, are monopolies or oligopolies that can pass on higher costs. In energy infrastructure, renewables in particular, pricing power flows from the regulatory framework.

Social infrastructure’s revenues are typically structured explicitly to inflation, as governments guarantee revenues and price indexation. Some investments, such as life sciences and laboratories, may even offer above-inflation returns. During Covid, when schools and libraries were closed, they continued to pay out regular returns to their investors, boosting their defensive status. 

Evolving infrastructures offer protection arising from strong structural growth from end markets including digital communications. 

We invest worldwide, but do have regional preferences, as this culture of dividend growth is more common on boards of directors in developed economies, in North America or Europe. It is harder to spot companies in emerging economies that meet these criteria. They operate in less stable economies with more volatile currencies. 

Flagship companies

Among the flagship companies of our strategy, I would cite Vinci, whose business portfolio includes transport infrastructures such as motorways and airports. Vinci has demonstrated its pricing power and its ability to raise its dividends, along with its great resilience in weathering the Covid crisis. I might also mention Crown Castle, a telecom tower operator in the US that has grasped opportunities arising from the 5G transition, which requires highly technical architectures that are quite different from 4G.

One more thing: if I were to compare infrastructure companies shares to private equity, I would say that infrastructure can offer the advantage of steady income and liquidity, with smoother portfolio rotations. They can also offer upside, given the growing interest from private equity in their attractive valuations. This is the case in particular of airports, datacentres and energy infrastructures, as recent experience has demonstrated. 

The information provided should not be considered a recommendation to purchase or sell any particular security. The value of the funds’ assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.

By Alex Araujo

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