Equities

Stable returns in unstable times? The case for listed infrastructure

10 min read 12 Dec 24

By Alex Araujo, Fund Manager

Marketing communication

While concerns about inflation have tempered optimism about the outlook for listed infrastructure, the asset class has historically offered protection against rising prices.
Infrastructure assets represent the backbone of the global economy and are likely to benefit from long-term drivers like decarbonisation, deglobalisation, and digitisation.
The essential nature of infrastructure means it could offer stability in uncertain times and potentially generate stable and growing cashflows across the vagaries of the economic cycle.

The last two years, marked by unprecedented rises in borrowing costs, have been challenging for listed infrastructure. However, we believe the asset class, which offers diversification, duration, and dividends, could provide investors with stable long-term returns in an increasingly unstable world.

During the summer, our hopes for a change in fortunes for the asset class were lifted by the Federal Reserve (Fed) and other major central banks embarking on an interest rate cutting cycle. With inflation seemingly under control and an economic ‘soft landing’ looking likely, there was growing optimism that we were entering a new investment regime that would favour strategies that have been hampered by rising rates.

Historically, listed infrastructure has delivered robust returns once the Fed ends its hike cycle (Figure 1); a shift in market leadership during the third quarter of 2024 provided some confidence that a potential regime change might be underway.

Figure 1: The end of the Fed tightening cycle is a potential catalyst for infrastructure

Performance of Listed Infrastructure after Fed pauses rate hikes

Source: CBRE Investment Management, UBS Global Infrastructure & Utilities 50/50 Index linked as of March 1, 2015, to the FTSE Global Core Infrastructure 50/50 Index, and MSCI World Index, Bloomberg Barclays Global Bond Aggregate Index, NFI-ODCE Value Weighted Index. Historical average performance is calculated before and after dates when the Fed signaled a pause in rate hikes (February 28, 1995, May 31, 2000, June 30, 2006, December 31, 2018 and July 31, 2023). Performance is based on monthly returns. Information is the opinion of CBRE Investment Management and is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Past performance is not a guide to future performance.

The value and income from the fund's 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. There is no guarantee that the fund will achieve its objective 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 and they should not be considered as a recommendation to purchase or sell any particular security.

Figure 2: Listed Infrastructure has outperformed during inflationary periods

Global Listed infrastructure vs Global Equities (1995 – 2023

Source: Principal Asset Management, Listed infrastructure: a missing piece in your portfolio, October 2024. Past performance is not a guide to future performance

Infrastructure and Trump 2.0

Although interest rates are expected to continue to decline in the coming months, the election of Donald Trump as US president has introduced some doubts about the pace and scale of monetary easing. Government bond yields have risen since the election as the market has taken the view that President-elect Trump’s proposed tax cuts and tariffs could be inflationary.

Intuitively, this development might be perceived as negative for listed infrastructure but we believe the situation should be viewed as more nuanced than that. If we take a step back and take a longer term view, we think there are reasons to be positive about the outlook for, and potential returns, from the asset class.

With Trump’s tax cuts and higher spending potentially leading to rising deficits and tariffs accelerating deglobalisation, there is a chance that we are entering a higher for longer inflationary period. In this environment, real (inflation-adjusted) returns become increasingly important to protect capital and grow investment returns.

Encouragingly, infrastructure has historically offered protection against rising inflation. This is due to the pricing power that comes with the provision of essential services. Typically, infrastructure companies have inflation-linked escalators built into their contracts, enabling their revenue to keep pace with inflation. This feature can help the asset class protect real returns when prices are rising.

There is another reason to believe that Trump 2.0 might not be as negative for infrastructure as some perceive. In his first term, Trump invested heavily in infrastructure. A key element of the ‘Make America Great Again’ policy is reshoring, energy security, and national infrastructure development. Although Trump has expressed opposition to renewables and there are concerns about the repeal of the Inflation Reduction Act, infrastructure could be a beneficiary of his reshoring and reindustrialisation agenda. In particular, energy-related businesses such as natural gas firms could potentially thrive in the new political environment.

While the potential impact of Trump’s policies is hotly debated by market participants, we take comfort from the fact that infrastructure can deliver resilient growth irrespective of the macroeconomic environment. The asset class has a strong track record of consistent earnings growth across all cycles and economic regimes.

Diverse exposure to essential assets

Despite some uncertainty around what Trump might mean for the asset class in the near term, we believe there are still compelling long-term grounds for optimism about the future of infrastructure.

First, countries are increasingly investing in critical infrastructure to secure their industrial and resource bases. Sectors such as utilities, transportation, and energy have an integral role to play in building the economy of the future.

As companies in this category own and operate physical infrastructure that represents the backbone of the global economy, they are likely to benefit from long-term drivers like decarbonisation, deglobalisation, and digitisation.

The importance of infrastructure in a changing world has not gone unnoticed. The private infrastructure world continues to grow its investment war chests and deals being struck in the private markets are, on average, at a 30% premium to the valuations found in public markets.

The growing appeal of infrastructure assets to this category of investors is arguably their essential nature and long-lasting operations. The long-term nature of the contracts and visibility on cash flow growth provide welcome and relatively unique visibility in a world of heightened risk and volatility.

Stability in uncertain times

The prevailing narrative is that policymakers are on track to deliver an economic soft landing, bringing inflation down without causing a recession. This outcome would be favourable for listed infrastructure as most infrastructure businesses such as airport operators and payments companies benefit from buoyant economic activity.

However, should the economic backdrop weaken, the asset class could still perform well in uncertain times, in our view, due to the stability of the services it provides and its ability to generate stable and growing cashflows across the vagaries of the economic cycle.

Importantly, the stability and (often inflation-linked) growth in cashflows enables these companies to consistently grow their dividend payments to shareholders, providing a reliable and growing income stream that can keep pace with inflation.

Differentiated approach

We have developed a differentiated approach to listed infrastructure that invests in a diverse mix of traditional economic infrastructure (such as transport, utilities, and energy), social infrastructure and civic facilities (including universities, schools, and hospitals), and evolving digital network infrastructure (such as data communication, financial payments, and data centres). This approach helps ensure balanced exposure to various sectors that are integral to the global economy.

It is also designed to offer diversification benefits and manage potential risks. Our strategy has provided downside protection in the challenging markets of 2018 and 2022, demonstrating that infrastructure can help de-correlation and risk management.

In an increasingly complex and unpredictable world, we believe that now is an attractive time for investors to take a closer look at an asset class that offers structural growth, inflation protection, real dividend returns, and liquidity at a discount to private alternatives (Figure 3).

Figure 3: Compelling time to revisit listed infrastructure?

FTSE Global Core Infrastructure 50/50 Total Return (USD) vs MSCI World

Source: Bloomberg, 4 November 2024. Past performance is not a guide to future performance.

Rolling period performance (%)	Year to end of MRQ³	YTD	1 Month	3 Months	6 Months	1 Year	3 Years % pa	5 Years % pa	FMT⁴% pa
Gross – EUR A Acc	10.5	8.6	-1.7	1.4	8.3	20.6	4.1	6.7	8.9
Net – EUR A Acc	8.7	6.6	-1.9	0.8	7.1	17.9	1.9	4.5	6.8
Benchmark¹	17.5	18.0	0.5	2.2	9.2	29.3	7.8	11.7	10.9
Secondary Benchmark*	15.0	15.1	0.1	3.6	11.2	24.2	6.7	5.1	6.8
Sector²	10.9	9.3	-1.5	2.4	8.9	19.6	3.1	3.5	4.8
Quartile Ranking	3	3	3	3	3	3	3	2	1

Calendar-year performance last 10 years (pa %)

Calendar year performance (%)	2023	2022	2021	2020	2019	2018	2017	2016	2015	2014
Gross – EUR A Acc	2.6	-1.9	24.7	-4.4	39.7	0.4	N/A	N/A	N/A	N/A
Net – EUR A Acc	0.4	-3.7	22.3	-6.3	36.7	-1.7	N/A	N/A	N/A	N/A
Benchmark¹	18.1	-13.0	27.5	6.7	28.9	-4.4	N/A	N/A	N/A	N/A
Secondary Benchmark*	-1.3	1.4	23.6	-12.0	27.4	0.8	N/A	N/A	N/A	N/A

¹ Performance comparison: The benchmark is the MSCI ACWI Net Return Index. The benchmark is a comparator against which the fund’s performance can be measured. It is a net return index which includes dividends after the deduction of withholding taxes. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund's portfolio construction. The fund is actively managed. The investment manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the benchmark’s constituents. The benchmark is not an ESG benchmark and is not consistent with the ESG Criteria and Sustainability Criteria. For further details of the fund’s ESG Criteria and Sustainability Criteria, please refer to the ESG Criteria and Sustainability Criteria document on our website. For further details of our ESG Product Framework, please see the fund’s Prospectus. The benchmark is shown in the share class currency. Past performance shown to 31 October 2018 is the MSCI ACWI Index . Past performance shown from 1 November 2018 is the MSCI ACWI Net Return Index

² Sector: Morningstar Sector Equity Infrastructure Sector. ³ Year to end of Most Recent Quarter: 30 September 2024. ⁴ Fund Manager Tenure: 05 October 2017 .
*FTSE Global Core 50/50 Global Infrastructure Index. The secondary benchmark, effective from 1st October 2024, is an additional benchmark for comparison purposes, for investors who may wish to see a comparison of the fund’s performance versus a listed infrastructure index

Source: Morningstar Inc. 31 October 2024, EUR A Acc share class, income reinvested, price to price, net of all fees. Gross returns are product returns (priced at midday) from Morningstar, with the actual Ongoing Charge Figure reinvested back into the price, including income reinvested. Performance data does not take account of commissions and costs incurred on the issue and redemption of units.

Investment Policy

The Fund invests at least 80% of its Net Asset Value in eligible publicly-listed equity securities issued by infrastructure companies, investment trusts and closed-ended real estate investment trusts ("REITs") across any market capitalisation that are domiciled in any country, including emerging markets. The minimum 80% allocation may include ordinary shares, preference shares and convertible bonds (the Fund may hold up to a maximum of 20% of its Net Asset value in Convertible Bonds). Infrastructure companies include those involved in the following business activities: utilities, energy, transport, health, education, security, communications and transactions. The Fund is expected to exhibit lower volatility and offer a higher dividend yield than the global equities market which is consistent with the characteristics of infrastructure securities. The Fund usually holds fewer than 50 stocks.
The Fund invests in securities that meet the ESG Criteria, applying an Exclusionary Approach and SDG-aligned investing as described in the precontractual annex to the Fund Supplement.
The Fund is actively managed, and its benchmark is the MSCI ACWI Net Return Index

The main risks associated with this fund:

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
ESG information from third-party data providers may be incomplete, inaccurate or unavailable. There is a risk that the investment manager may incorrectly assess a security or issuer, resulting in the incorrect inclusion or exclusion of a security in the portfolio of the fund.
Please note, investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as building or shares of a company, as these are only the underlying assets owned by the fund.
Further details of the risks that apply to the fund can be found in the fund's Prospectus.

Sustainability information:

The Fund promotes Environmental/Social (E/S) characteristics and while it does not have as its objective a sustainable investment, it will have a minimum proportion of 40% of sustainable investments.
You can find Fund’s sustainability-related disclosures on M&G website.

Learn more about the fund