Global listed infrastructure has become a popular asset class since the global financial crisis, particularly in the wholesale sector. But, according to Australian research house, Zenith, the tailwinds of the last nine years could become headwinds as interest rates rise. Zenith advises to look under the bonnet before choosing a manager.
A Zenith report on the 22 global listed infrastructure funds in its research universe was launched last week, coinciding with a presentation by 4D Infrastructure, the infrastructure boutique under the Bennelong Funds Management Umbrella.
Both Zenith’s Justin Tay, a senior investment analyst, and 4D Infrastructure’s Greg Goodsell, the firm’s global equity strategist, pointed to significant differences between the types of infrastructure investments and the types of infrastructure managers. Investors should be cautious, especially if the environment gets more difficult for infrastructure funds.
4D’s Goodsell said there was a big difference in investment characteristics between utility-type infrastructure projects which were usually formerly government owned and highly regulated monopolies, and the new development projects, such as toll roads, which are user-pays businesses.
As he has noted previously, there’s a difference, too, between listed and unlisted infrastructure. Listed infrastructure investments tend to be at a discount compared with unlisted despite their liquidity advantage and even when the underlying Assets are the same. Goodsell says that the weight of money and desire for control by big institutional investors in the unlisted market has created a premium in that market segment.
He believes that geopolitical risks should make investors cautious, notwithstanding improving growth prospects in most major markets, but they should try to separate the politics from the economics.
Justin Tay’s report for Zenith clients points out that the global listed funds market in Australia has grown 28.6 per cent to $41.8 billion in the 12 months to April 30. At the same time, global listed infrastructure as represented by the FTSE Global Core Infrastructure 50/50 $A (Hedged) Composite Index generated a return of 14.2 per cent in the 12 months.
From an investment performance perspective, global infrastructure securities, like broader risk assets globally, have benefited from the low interest rate environment that commenced around the GFC. The reduction in interest rates has had a direct impact with regards to the valuation techniques used for infrastructure assets.
But Tay said: “Taking the prospect of tightening monetary policy into account, Zenith believes the tailwind that infrastructure securities enjoyed could soon become a headwind.
“On the upside, global listed infrastructure is comprised of multiple sub-sectors, each which has different return drivers, characteristics and ultimately, different sensitivity to interest rates.”
Generally, those sub-sectors that have higher yields, higher leverage and are less exposed to the broader economy, such as ‘towers’ and utilities, are more sensitive to interest rate movements. Conversely, subsectors that have lower yields, lower relative leverage and are more exposed to the broader economy, such as railways and ports, are less interest rate sensitive.
“Considering the different sensitivities to interest rates across infrastructure sub-sectors, we believe it is too simplistic to apply a broad-based assumption that all infrastructure investments are bond proxies,” Tay said.
Given the potential challenges ahead for global infrastructure securities, Zenith believes that active management can add significant value to client portfolios.
Tay said: “Through the development of well-informed views and the flexibility to deviate from traditional global listed infrastructure benchmarks, active managers can position portfolios to enhance or maintain the defensive characteristics of infrastructure strategies.
“Although infrastructure assets may share similar attributes, clients need to pay close attention to how assets within the sector are defined and classified – we do not believe all infrastructure exposures are equal with regards to the ability to exhibit a defensive risk/return profile when needed.
“Going forward, given the potential for heightened macroeconomic impacts, Zenith believes that it is imperative that investors consider the case for active management within global listed infrastructure.”
Greg Bright is publisher of Investor Strategy News (Australia)