CG/LA Infrastructure's InfraBlog
July 10, 2013, 2:44 pm
Infrastructure seems like a fairly boring asset class – all pipelines, roadways and other such non-fun stuff – but with low-volatility returns of up to 30 per cent a year, the sector has its attractions.
And while infrastructure investment is a global game, Australia looms large in the portfolios of infrastructure funds – due to the quality of investment opportunities that exist in the country.
A report by Lonsec Managed Funds Research says listed infrastructure funds have recovered from losses experienced during the Global Financial Crisis and, in the one-year and three-year periods to April, global infrastructure securities outperformed global equities.
Lonsec senior investment analyst and report co-author Andrew Coutts said global infrastructure can offer equity-like returns with lower volatility and had been true to form in the past year.
“Global infrastructure securities delivered solid double digit returns over the year to March 2013, outperforming most major asset classes with the exception of global property, which was the strongest performer overall,” Mr Coutts wrote in the report.
“The sector has been the beneficiary of a general improvement in global equity market sentiment and, like global property, has been popular with investors seeking out higher yielding, defensive sectors.”
Infrastructure is a broad class, covering electricity transmission and distribution, water utilities, ports, rail, airports, pipelines, bridges, tollroads and communications.
There is also a small “social infrastructure” subsector, covering assets such as prisons and hospitals.
In recent years the boom sectors have been communications and US gas pipelines.
Mr Coutts said communications assets in the benchmark UBS Global Infrastructure & Utilities Index returned nearly 30 per cent in the year to March 31 and 18 per cent over three years, driven by the global boom in mobile devices.
“Everyone’s got smartphones, iPads – that was obviously driving a lot of the growth,” he said.
Mobile phone tower companies, such as Crown Castle in the US, have benefited from the growing need of carriers to increase network capacity as data use explodes, lifting rental charges and adding extra receivers onto existing towers.
The shale gas boom in the US has lifted energy transmission and distribution returns to 21.3 per cent for the year, with Canadian pipeline business Endbridge returning 29 per cent per annum over the past three years.
Mr Coutts cautions, however, that generally infrastructure is a stable asset class and Lonsec’s long-term view is for total returns of 8.5 per cent a year.
“Growth is more driven by things like CPI, though within infrastructure there are subsectors that have different drivers.”
Lonsec identified Australian assets feature strongly in global portfolios, despite the market being relatively narrow.
“The Australian sector is pretty mature – it pretty much leads the world in terms of how mature the private sector infrastructure sector is,” Mr Coutts said.
There’s quality of the assets but there’s also a pretty stable regulatory process here as well.
Australian toll road operator Transurban is the most popular global infrastructure company among funds, featuring in the top 10 investments of five out of nine funds studied by Lonsec.
Infrastructure assets are generally accessed via a fund rather than retail investments but the sector is looking promising, with Lonsec’s report finding fund managers are upbeat about their outlook as increasing urbanisation, infrastructure renewal, new data technologies and energy security needs provide ongoing growth opportunities.