Listed infrastructure is back in the buy zone after experiencing one of its worst quarters on record over the three months to March this year, according to AMP Capital’s Giuseppe Corona.
The London-based Corona, AMP Capital head of global listed infrastructure, said the asset class was richly-priced at the beginning of 2018.
“But the last few months have been challenging for the asset class and portfolio managers,” he said. “In fact, the first quarter of 2018 was the third worst on record for listed infrastructure relative to global equities.
“We see that as creating more opportunities than risks.”
Corona said listed infrastructure may have been hit particularly hard during the turbulent start to 2018 due to the asset class’ traditional association with interest rates.
In an environment of rising interest rates infrastructure assets, many of which are highly-leveraged, tend to be marked down by cautious investors.
“But the market sells down all listed infrastructure regardless of the interest rate sensitivity of the underlying assets,” Corona said.
He said listed infrastructure specialists can pick up bargains among the carnage by focusing on the fundamental drivers of each stock.
AMP Capital divides the listed infrastructure universe into four sectors: utilities; transport; communications; and, energy.
“Each infrastructure sector is unique relative to the others,” Corona said. “But all four sectors have long-term positive tailwinds behind them.”
Utilities is affected by factors such as interest rates and asset growth; transport is closely linked to overall economic performance; energy follows the commodity cycle; while communications is the “most idiosyncratic” sector, hinging on technological advances (for example, growing data consumption as mobile networks upgrade).
Despite the positive vibes for infrastructure as a whole, the manager does shift weightings between sectors over time – albeit that the portfolio is built on stock-specific research rather than macro-considerations.
Currently, the manager is underweight utilities and bullish on energy.
“Of the infrastructure sectors, utilities is most affected by interest rates – it’s the classic bond proxy – so we’re cautious about it,” he said. “But in a period of rising interest rates and inflation then energy is a good place to be.”
Energy stocks constitute about 35 per cent of the AMP Capital listed infrastructure portfolio with a bent to US-domiciled assets.
The weighting to energy inevitably exposes the portfolio to oil and gas producers that have come under pressure as investors mull over the shift to a low-carbon economy and environmental, social and governance (ESG) factors.
Corona said AMP Capital does incorporate ESG into its portfolio construction process but the oil and gas industries won’t disappear overnight.
“Production and consumption of oil and gas are both at all-time highs and are expected to keep growing,” he said. “And right now gas is one of the cleanest fuel sources – there’s a structural growth story and the US is one of the cheapest producers [of gas].”
However, over the long term – 20 years out – the fossil fuel industry is likely to look different with lower growth rates expected, Corona said.
AMP Capital already has one foot in the ‘renewables’ future with a sizeable stake in ‘green’ energy companies.
“About 10 per cent of the fund is in the California energy sector, which is at the forefront of growth in renewables,” he said.
However, the AMP portfolio invests in supporting infrastructure areas – such as the transmission grid – rather than renewable energy producers.
In particular, Corona said the manager shies away from European green energy producers who have been propped up by unsustainable government subsidies.
“We’ve seen lots of countries change the regulations [including subsidies] on renewable assets – and investors are usually the last to be considered in that value chain,” he said.
Overall, AMP Capital takes an “old-fashioned” view on defining infrastructure, Corona said with an emphasis on “real assets” supported by stable revenue, long-term contracts and regulation.
“We look for assets which operate in an environment with strong long-term advantages and a high barrier to entry,” he said. “That’s the only way [infrastructure assets] can preserve their revenue over the long term.”
Currently, the AMP portfolio holds about 35-40 stocks out of a potential universe of 300 or so. The $2 billion plus institutional fund is benchmarked against the Dow Jones Brookfield Global Infrastructure Index.
Over the five years to the end of March this year the AMP Capital fund returned 9.52 per cent gross against the benchmark 8.97 per cent; and -6.72 per cent for first quarter of 2018 compared to the index -5.24 per cent.
Corona said listed infrastructure is now increasingly seen by investors as a stand-alone asset class with its own diversification, income and inflation-hedging characteristics.
The dozen or so listed infrastructure managers in AMP Capital’s peer group have seen collective funds under management triple from about $20 billion in 2012 to $60 billion at the last count, he said.