Infrastructure has proven its worth as an inflation-protective asset class over the last 15 years, according to a new analysis from Australian boutique fund manager Maple-Brown Abbott (MBA).
The MBA study found the global listed infrastructure benchmark delivered dividend growth at least in line with inflation as the broader international equities “struggled to provide stable real income levels” during the 15 years to the end of 2020.
Authored by MBA co-founder, Steven Kempler, the report says “infrastructure has delivered a positive real growth in income over most short and long-term periods”.
“In particular, between June 2006 and June 2009, dividends from global equities did not grow at all in real terms.”
Over the 15-year period, listed infrastructure (as measured by the FTSE Global Core Infrastructure 50/50 Index) achieved an average dividend yield of 3.3 per cent against 2 and 2.3 per cent for comparative equities and bond benchmarks, respectively.
“… for more than a decade, the flat coupons of government bonds have provided structurally lower income than infrastructure,” the MBA study says. “Conversely, the observed growth in dividends of global infrastructure continues to provide investors with an increasing income yield over time and highlights that a decision to allocate away from bonds to infrastructure can actually enhance total portfolio income.”
But Kempler says not all infrastructure assets are equally inflation-proof with at least three factors investors need to weigh up, including the:
- extent of inflation linkage in revenues;
- operating cost structure and ability to maintain margins; and,
- capital structure/financing.
For example, while infrastructure assets – such as toll roads – may have in-built inflation-linked pricing mechanisms that pass through to investors, some debt structures may detract from those gains.
“Higher inflation may be partly offset by the company’s capital structure to the extent it has inflation-linked debt obligation, or floating rate debt that may see rates rise with inflation,” the paper says.
Many infrastructure companies are swapping out floating-rate debt for fixed-rate borrowings, the study says, to cut exposure to potential rising short-term interest rates.
“Duration also matters, with longer maturities of fixed rate debt instruments further insulating business from rising inflation and rates over time,” the report says.
With price-rise expectations – at least in the short term – now rising to levels not seen in almost 20 years, Kempler says investors are increasingly worried about where to hide from inflationary pressures.
“Our recent research shows this belief is backed by evidence and affirms our view that infrastructure assets can help investors seeking a combination of performance and an inflation hedge to better meet those objectives,” the paper says.
MBA manages over A$1 billion in its global listed infrastructure fund, which is represented in NZ by third-party marketing firm, Heathcote Investment Partners. In 2019, MBA secured its first major institutional mandate in NZ after winning a $250 million allocation (now likely more than doubled) from ANZ Investments.
NZ retail investors now also have access to the asset class through a new portfolio investment entity fund managed by the Australia-based First Sentier Investors. The First Sentier Global Listed Infrastructure Fund was previously a wholesale-only strategy, originally offered under the Colonial First State Global Asset Management (CFSGAM) label. Start-up NZ boutique, Kernel Wealth, also recently launched a listed infrastructure fund – currently the group’s biggest product with over $65 million under management.