by Wilson Magee

Infrastructure

Bridging the gap: Global listed infrastructure

Wilson Magee, Director of Global Real Estate and Infrastructure Securities for Franklin Templeton
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A portfolio of poorly performing investments may be diversified, but it’s not necessarily a path to higher risk-adjusted returns or to the sort of stability one might hope could survive bouts of volatility. For investors hunting for classes to diversify into, infrastructure is the way forward.

Global listed infrastructure focuses on assets that provide essential services which are necessary for populations and economies to function, prosper and grow. The asset class invests in transportation such as rail, airports (but typically not aircraft), water utilities, electricity utilities, communications infrastructure (for example, mobile phone masts), toll roads and ports. Infrastructure includes essential energy services, such as transport and storage but not exploration and production.

Playing Defense

We think one of the most attractive potential benefits of global listed infrastructure is its relatively stable revenue streams, a feature that has become particularly appealing to volatility-weary investors. Coupled with an attractive historical dividend yield, this asset class demonstrates underlying defensiveness in cash flows.

Part of the appeal of the asset class stems from the essential nature of the assets themselves, which have relatively monopolistic and regulated positions, high barriers to entry, stable demand and long duration assets with defined revenue streams. Such characteristics can provide the asset class with a degree of protection from the business and economic cycles that is not available to equities. This is why, we think, we’ve seen infrastructure investments deliver continued earnings growth and stability during the course of the global financial crisis.

Global Growth

We believe global listed infrastructure as an asset class is poised for strong growth. Three important growth themes for infrastructure worldwide support this view. The first is aging infrastructure, which in many developed markets needs to be repaired, replaced, or upgraded. One estimate suggests that by 2020 the US needs to spend US$3.6 trillion to repair aging infrastructure, and globally the estimates are closer to US$57 trillion.

The second growth-supporting theme is global population growth, particularly in emerging markets where urbanisation and an expanding middle class are likely to drive rapid growth in demand for new infrastructure.

Globally, the middle class is expected to grow by 800 million people from 2005 through 2015. From 2015 through 2025, another 1.5 billion people are expected to be added to the middle class. A rising middle class will require infrastructure to support the increased demand for essential services and transportation of goods and products.

And third, with a combination of increased fiscal spending and economic distress, a significant gap in government infrastructure spending could occur during the next 20 years in both the developed and emerging markets. In our view, this could create an enormous potential opportunity for private listed infrastructure investment.

These growth themes indicate to us that prospects for global listed infrastructure investment look promising, and the asset class looks attractive when compared with other asset classes, such as global equities generally, US equities, and bonds.

Don’t Forget Dividends

An important component of the global listed infrastructure asset class has been a history of dividends. 

Historically, dividend growth has also outpaced inflation, having grown annually over the last 10 years, and the compound growth rate of 11.3% annually has easily outpaced inflation. However, we do not expect dividend growth rates in the future to be as high as they have been in the past. Long-term inflation-linked contracts are a frequent characteristic of many infrastructure investments, often supporting both dividend stability and growth.

Here, and There, and There, and There

In our view, investors looking for diversification will find that global listed infrastructure can provide a diversified source of income, as well as attractive growth potential.

While diversification doesn’t guarantee profit or protect against loss, infrastructure as an asset class offers global opportunities spanning North America, Europe, Asia Pacific and Latin America. We are particularly enthusiastic about the prospects for US energy infrastructure and for Latin America, where we expect significant growth could be possible.

Regardless of where the opportunity is, we believe a bottom-up stock selection process is paramount to long-term investment success and that infrastructure can provide investors looking for both potential income and appreciation an attractive solution.

 

 

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