Global Infrastructure: Building for the future

By Jayson Forrest

Mega themes – such as decarbonisation, digitalisation and transport mobility – all require heavy investment into new and existing infrastructure. Justin Lannen (Maple-Brown Abbott) discusses which investments are poised to benefit from these trends

As an asset class, infrastructure is gaining increasing attention by advisers and investors for its defensive qualities and attractive risk-adjusted returns.

Essentially, infrastructure are physical structures and networks that provide services that are essential to our daily lives and the growth of our economies. They tend to be monopoly networks – like airports, tollways, water, electricity and gas utilities – which often have inflation protection.

“That’s where you get the defensiveness from,” says Justin Lannen – Co-Founder and Portfolio Manager, Global Listed Infrastructure at Maple-Brown Abbott. “Outside of a pandemic for infrastructure like airports and tollways, large numbers of people use and depend on these assets. These essential services are monopolistic strategic businesses, with stable cashflows and predictable growth into the future that is linked to inflation.”

Speaking at the 2023 IMAP Portfolio Management Conference in Melbourne, Justin points to industry data covering the period from 2005, which demonstrates the defensiveness of infrastructure, particularly when markets are down. With its downside protection, global listed infrastructure has outperformed global equities in 15 out of 19 quarters. He attributes this to the essential service nature of infrastructure assets that generally aren’t captive to business cycles, compared to other assets on the sharemarket.

According to Justin, 2022 was a testing year for asset markets, as the increase in inflation and interest rates hit markets globally. Yet despite both global equities (-12.2 per cent) and global fixed income (-12.3 per cent) being down, global listed infrastructure bucked the trend, remaining slightly in the black at 2 per cent due to its defensive qualities.

“The thing that really distinguishes infrastructure is its inflation protection. This helped to insulate infrastructure from rising interest rates last year,” he says. And it’s these defensive qualities of infrastructure that motivate the clients of Maple-Brown Abbott to allocate between 5-10 per cent of their portfolio to infrastructure.

Justin believes the case for investing in infrastructure is compelling. “It’s a defensive asset class offering attractive risk-adjusted returns,” he says. “Investing in these essential businesses provides investors with assets that offer income stability, lower volatility, inflation protection characteristics, and portfolio diversification.”

However, what Justin finds particularly interesting about this asset space is the lack of infrastructure available globally. He says the world is short of infrastructure and there needs to be more infrastructure investment in order to achieve better living standards, to decarbonise, to digitise societies, and to improve transport mobility.

“These are multi-decade themes, where a lot of capital needs to be invested in infrastructure. This will create many investment opportunities for both direct and listed infrastructure investors within these mega themes,” says Justin. 

As part of its process of identifying infrastructure assets for its portfolio, Maple-Brown Abbott believes core infrastructure should offer a strong combination of inflation protection and low cash volatility. However, according to Justin, infrastructure indices include a few sectors that lack these characteristics, and as such, Maple-Brown Abbott views these sectors as not being pure infrastructure.

“We exclude a lot of businesses that look like infrastructure. That includes ‘above rail’ railways, seaports, satellites, and also utilities that have too much commodity price exposure. These businesses typically are in overly competitive markets and are too captive to the business cycle.”

So, when it comes to portfolio positioning, the manager prefers to invest in undervalued infrastructure stocks, with a focus on organic growth and inflation protection. A couple of sectors where it has identified opportunities for investing are: North American regulated utilities, and listed U.K. and European infrastructure.

According to Justin, Maple-Brown Abbott has spotted opportunities in North American regulated utilities, as electric utilities (grids and generators) stand to benefit from clean energy and decarbonisation trends. There is also an expectation that the earnings of these utilities will be relatively resilient, even in weaker macro-economic environments. In addition, the relative valuations are in-line with historical levels, but the total return outlook (dividend yield + growth) remains attractive.

“As an infrastructure investor, the U.S. is a good place to invest. You’re getting about a 10 per cent nominal ROE on your investments. And because many of these companies are monopolies, there’s very low risk investing with them,” says Justin. “We believe there are plenty of opportunities in North American utilities.”

As for listed U.K. and European infrastructure, Maple-Brown Abbott believes there are stock opportunities in quality business infrastructure, which is supported by valuations. It has identified the potential for cellular towers to benefit from digitalisation, while U.K. regulated utilities (like U.K. water monopolies) are benefiting from earnings certainty, inflation pass-through, and ESG thematics.

“Alongside these opportunities, we also like toll roads in North America, but we remain cautious with airports,” says Justin. “We have a 16 per cent weighting in our portfolio to toll roads but only 3 per cent to airports. That’s because we believe airports are economically sensitive.”

Some of Maple-Brown Abbott’s favoured high conviction holdings include:

• Ferrovial SA – a Spanish multinational toll road and airport concessions operator, with high complexity construction capabilities;
• Ameren Corporation – a fully rate-regulated electric and gas utility that operates in the U.S.;
• American Electric Power – a U.S. regulated electric utility that operates in 11 states across the Midwest and South;
• Getlink – this company is licensed to operate the Channel Tunnel until 2086; and
• Crown Castle – the largest provider of shared wireless infrastructure in the U.S., primarily through cellular phone towers.

In terms of the global investment market, Maple-Brown Abbott believes volatility in energy prices will continue, due primarily to the Russia/Ukraine conflict and the transition to renewable energy.

“Energy prices are likely to remain elevated for net energy importers, but this may help accelerate the energy transition to renewables,” says Justin. “Energy security is a massive theme now and infrastructure plays right into that.

“A couple of the companies we are investing in, like Cheniere Energy, own LNG export facilities on the U.S. Gulf Coast with long-term contracts in place. We don’t want to invest in actual gas companies, instead, we want to invest in the infrastructure that carries or moves the gas. So, energy security and good infrastructure are big themes, particularly around renewables.”

He remains confident that decarbonisation will continue to remain one of the key mega themes in infrastructure in the years ahead. “We’re already seeing investments in renewables across all countries, including Australia. However, most of our exposure in renewables is in the U.S. and United Kingdom.”

As the global economy is likely to remain volatile, with tail risks coming from a potential escalation of the Ukraine conflict, as well as the relative strength of China’s re-opening recovery post-COVID, and the sustainability of emerging market debt, Justin believes global listed infrastructure remains well placed to meet this volatility due to its defensive characteristics and ability to generate attractive risk-adjusted returns

Key elements of infrastructure to consider when looking at investment opportunities

1. Infrastructure assets tend to have strong strategic positions and provide natural monopolies.
2. This asset comprises of physical networks and structures that provide services which are essential to the basic functioning of society and economic productivity.
3. Remember, significant ongoing capital is required to develop and maintain these structures, irrespective of economic climates.
4. Infrastructure generally provides lower cashflow volatility and higher earnings stability, compared to other asset classes, like global equities.
5. Many infrastructure assets have strong inflation linkage and offer higher income, which are both favourable characteristics in volatile and inflationary environments.
6. Infrastructure assets provide considerable portfolio diversification benefits.

Source: Maple-Brown Abbott

Justin Lannen is Co-Founder and Portfolio Manager, Global Listed Infrastructure at Maple-Brown Abbott.

He spoke on the topic ‘Opportunities in global listed infrastructure’ at the 2023 IMAP Portfolio Management Conference – Melbourne.