What is Infrastructure equity and why do we hold it in portfolios

Key Points 

• Investing in ‘Global Listed Infrastructure’ means that you own shares of companies that provide essential services for society and the economy. For example, electricity providers, railways, airports and communication companies. 
• The asset-class provides diversification to global equities, due to predictable revenues that are often defined in contracts and linked to inflation. 
• We hold infrastructure equities in our Hybrid and Global ESG Themes portfolios. We think the asset-class will benefit from exposure to long-term structural growth in renewable energy, clean transport and digital connectivity. 

What is listed infrastructure equity 

Listed Infrastructure equities are shares in publicly listed companies that provide services to society and the economy. This could be electricity companies, gas and water distribution, broadcasting companies and transportation companies. While these companies fall across different sectors, they have a set of common characteristics:

1. the companies own and manage physical assets that are difficult to operate. As such, they benefit from being industry monopolies,
2. the revenues are supported by relatively stable and predictable cash flows; and
3. infrastructure companies have an ability to pass on inflation to the end-users of their assets. 

Why we hold it in portfolios 

We have listed infrastructure companies in our strategic asset allocation. We think the asset-class provides a good hedge to inflation, diversification to traditional global equities and exposure to long-term structural growth trends. 

Infrastructure as a hedge to inflation – In many countries, utility companies are regulated such that governments allow the companies to make a “real” return (a return on assets after inflation). For more market-based sectors such as communication companies, inflation might not be explicit in a contract but their pricing power enables the company to move prices in-line with inflation. This enabled infrastructure companies to perform better than traditional equities in 2022. 

Diversification to traditional equities – while our investment in infrastructure is in publicly listed equity, we believe infrastructure equity provides more defensive exposure within equities (albeit returns are still partly determined by the performance of the global stock market). Infrastructure companies are mostly essential. For example, a utility service such as providing drinking water or distributing energy will always be needed regardless of underlying economic demand. This makes the asset-class particularly attractive in periods of economic weakness. 

The chart below shows the calendar year performance (percentage total return) for global equities and infrastructure equities. Infrastructure equity often performs better during years of weaker equity performance such as 2011, 2018 and 2022. 

Structural tailwinds – there are powerful long-term forces driving the demand for investment in infrastructure. Infrastructure is well positioned to benefit from the decarbonisation of the world’s energy needs. For example, utilities, which represent about a half of the global listed infrastructure opportunity set, are the builders and operators of solar and wind farms. Digitalisation is another key long-term theme for the asset class. The changes required during the pandemic accelerated a shift towards the use of wireless data in many people’s everyday lives. Structural growth in demand for mobile data is an example of the broadening of the asset-class. Investment in infrastructure is being driven by government policy and consumer demand – key to enabling further investment. 

What are the risks of investing in infrastructure

The key risks of investing in infrastructure are political and regulatory intervention. These risks can be mitigated by diversification across countries, sectors and regulators, and by using an active manager who is able to understand and navigate those risks. Infrastructure sectors are also more defensive than global equities and therefore we expect the asset-class to underperform other equities when economic growth is stronger for example 2021 as shown in the chart above. 

Our exposure 

M&G Wealth invests in infrastructure via a global infrastructure equity fund which we hold in our Hybrid and Global ESG Themes ranges. Investing in a global fund gives exposure to the different regional government policies and enables it to capitalise on attractive opportunities going forward. The fund has a bias towards mid-sized infrastructure companies which have delivered the majority of the outperformance in recent years.