Investing Beyond the Mainstream: Infrastructure

And infrastructure has historically been seen as vulnerable to interest rate or inflation rises, in the same way that bonds are, the argument being that the present value of their often-fixed future cash flows is worth less after a rate rise than before. In fact, research from 4D Infrastructure, a specialist manager whose funds are now available through Bennelong Funds Management in Australia, argues that infrastructure stocks can out-perform when interest rates start rising – since future earnings are not really fixed at all, but tend to correlate with rates and inflation. But as always, it’s at least as important for investors to look forward when assessing an investment, rather than just backward at impressive returns.

“In recent years infrastructure has come to be viewed as a low-geared, stable-yield asset class with reliable income streams,” says Louis Christopher, founder of SQM Research, an independent research house. “There is a marked difference between your standard infrastructure stock pre-2008 and post-2008: before, they provided stable income, but were geared to the hilt, making the whole thing very volatile.” Since then gearing and volatility have dropped, Christopher says, encouraging more advisors and investors to look at it for clients.

The easiest way to gain exposure is to invest directly in infrastructure listed stocks, or in funds that pick from that investment universe. That allows for liquidity, which is obviously something you wouldn’t get if you physically own an airport or a toll road. Some funds do invest in direct infrastructure, but they are much harder for retail investors to reach, and if investors do get in to them, it is important they understand the mechanism to get out again.

SMQ rates several funds at four out of five or above (anything over 3.75 being considered good). They are RARE Infrastructure, which has an emerging markets and a value infrastructure fund; the Magellan Infrastructure Fund; the Redpoint Global Infrastructure Fund, which is available to retail investors through the MLC wrap; and the Maple-Brown Abbott Global Listed Infrastructure Fund. It is in the process of rating a new product that Bennelong Funds Management has built with the global infrastructure investment manager 4 Corners Infrastructure. There are also infrastructure products available from AMP and Colonial First State, among others, which SMQ doesn’t currently rate.

Some financial planners, like Andrew Buchan at HLB Mann Judd in Brisbane, bracket property and infrastructure together, calling them “real assets”. “We’ve been strong on infrastructure but it’s run hard now, especially in Australia,” he says, referring both to individual infrastructure stocks like Transurban and Sydney Airports, and global infrastructure funds like Magellan. “We are more taking profit from them than investing more at the moment: when rates start to rise, whenever that may be, prices on listed infrastructure may turn a little bit. It’s a great sector to have been in, though.

“We’re always interested in unlisted infrastructure, but it’s very difficult to get your hands on.”

He does, though, invest in some water funds, which one might bracket with infrastructure. For example, he looks at the Blue Sky Water Fund, which invests in water entitlements – the perpetual right to access a share of a defined water resource such as a river system or aquifer, issued and regulated by state governments. There is also a recent listed investment company based on water, Duxton Water Limited, which also invests in water entitlements but is accessible in a listed form. “Because that one’s liquid, I can get my money in two or three days, whereas the Blue Sky fund is still great but doesn’t have the same liquidity,” Buchan says. “You can expect a return of 5, 6, 7%.”

Paul Moran, founder and financial planner at Moran Howlett, uses the Magellan fund and a global exchange-traded fund from VanEck, called the VanEck Vectors Global Infrastructure ETF, or IFRA. “REITs here are pretty overpriced and frequently trading above net tangible assets, whereas infrastructure doesn’t tend to do that,” he says. “So we did a move away from property and into infrastructure to give us a steady income, low-volatility return. It helps to dampen volatility in the overall portfolio.”

For Kris Walesby at ANZETF, “I’m very strong on infrastructure. It has a good place in the portfolio. The reason it’s so good now is because rates are so low,” he says. “It’s generally – but not always – stable and is giving above central bank-rate returns in most developed markets right now.” Unsurprisingly, he recommends ETFs for this purpose. “They are a good way to play an asset like listed infrastructure, where you can get exposure to 40 or 50 companies around the world and spread the risk without paying much for a fund manager to do it.”