Listed infrastructure kept its historical defensive record intact during the recent bout of market volatility, according to Russell Investments’ Adam Babson.
In NZ last week, Babson, portfolio manager for the Russell Global Listed Infrastructure Fund, said the sector “held up well” as wider equity markets stumbled heavily early in February.
“In a market downturn [listed infrastructure] may fall but not as much as broader equities,” Babson said.
Russell research shows the S&P Global Infrastructure Index outperformed the wider share market in 13 of the 18 negative quarters recorded since 2001.
“On average, the infrastructure sector has delivered a total return of 2.8% in excess of global equities during negative quarters,” the Russell research says.
But downside protection is just one of the three main features listed infrastructure offers investors, Babson said, along with diversification and steady yield.
“There can also be some degree of inflation protection,” he said.
However, listed infrastructure is probably one of the least index-friendly asset classes as definitions can vary considerably across benchmark constructers and managers.
In a paper published this month, Babson says index providers struggle to sift out the so-called ‘pure-play’ infrastructure stocks – such as toll roads, regulated utilities, airports, seaports and mobile phone towers – from the diverse utilities sector by using a “naïve formula”.
“Most indexes take one of two construction approaches: applying a market cap weighting methodology to ‘infrastructure sectors’ (in which case utilities will always dominate the index) or imposing fairly arbitrary hard caps on these sectors,” the paper says.
Babson said the ‘pure-play’ approach favoured by Russell demands an active management style to both define the listed infrastructure universe (based on forensic examination of company accounts) and stock selection.
“Essentially, active management affords not only the classic alpha opportunity, but also a ‘better beta’ opportunity, in that active managers are able to screen the investment universe for companies that have pure-play infrastructure characteristics,” he says in the Russell paper.
The Russell global infrastructure fund, for example, deviates considerably from its preferred S&P index, holding about 200 stocks compared to just 75 in the benchmark.
“There’s a lot of opportunities outside the index,” Babson said.
He said three main macro factors currently dominate listed infrastructure portfolio allocation decisions, namely: rising interest rates; energy prices; and, pro-cyclical expansion.
“We’re underweight rate-sensitive companies – but not by too much,” Babson said.
The Russell listed infrastructure product, structured as an Australian unit trust, splits its approximately A$4.5 billion among four underlying managers: Colonial First State (35 per cent); Nuveen Asset Management (30 per cent); Cohen & Steers (15 per cent); and, Maple-Brown Abbott (15 per cent).
While listed infrastructure is largely an institutional play this side of the world, Babson said in North America retail investors represent the biggest share of the Russell fund.
The Russell paper says institutional investors with higher illiquidity tolerance typically should allocate more to unlisted infrastructure than “mid-market and smaller investors”.
“For retail investors, given the dearth of private options, the entirety of infrastructure exposure will likely come from listed securities,” the Babson paper says.
He said listed infrastructure allocations usually range between 3-10 per cent of client portfolios.