Why is Infrastructure so appealing as part of an investment strategy?
Infrastructure - the bloodline of any economy
- Infrastructure is the bloodline of any economy.
- Companies involved are defensive, mature, normally exhibiting stable predictable dividends, with monopoly characteristic.
- Investing in infrastructure companies tends to provide capital protection.
- Investing in infrastructure can be appealing in the current point in the economic cycle.
Oxford Economics recently presented research forecasting that global infrastructure investment needs to be $94 trillion between 2016 and 2040; an average of $3.7 trillion per year, and a further $3.5 trillion required to meet the United Nations’ Sustainable Development Goals for electricity and water. Economies need reliable infrastructure to help get goods and services to market, this means development and maintenance of efficient strategic assets like road, rail, sea ports, gas, electric and water utilities and communications infrastructure. In developing countries this means new facilities where as in the US and Europe it is likely to result in upgrading current facilities and improving their efficiency.
Companies involved in infrastructure development are naturally seen as being defensive and mature, suggesting reasonable levels of dividends, and dividend growth with many having inflation linked pricing built into their models/services. This is further aided by high barriers to entry, strong pricing power, sustainable growth and predictable cash flows making the asset class a relatively safe haven in an uncertain financial world. For these reasons infrastructure stocks are often referred to as bond proxies, as they are seen as protecting capital to provide a stable income while minimising volatility relative to the wider equity market.
Stable yet growing
Infrastructure spending drives a country’s economic growth and provides jobs. Data for the early months of 2019 suggests that global growth is slowing down and weak growth prevails in Japan, the US and the Eurozone. China has responded to its softening growth by increasing infrastructure spending with a flood of debt designed to fund infrastructure. While in the US, the government has approved a $200 billion federally funded investment to leverage at least $1.5 trillion in infrastructure investment.
With underlying inflation stable, monetary tightening appears to be off the cards and central banks, especially FED and ECB, have room to pause the rate hiking. Markets tend to respond to such economic conditions with increasing volatility; therefore investing in infrastructure could be appealing to investors who prefer a stable income with fewer surprises.
Choosing the cream of the crop
There are only a handful long-established funds specialising in this asset class and the following funds both aim to generate income capital growth. And both are constituents of our Multi-Manager funds.
- Legg Mason IF RARE Global Infrastructure Income seeks to generate high sustainable yield from an asset class with secular growth and manages through changing sentiment environments by rotating between regions and sectors. Currently about 15% of the portfolio is invested in the emerging market with an option to invest up to 20%.
- First State Global Listed Infrastructure focuses on the companies that can self-fund the expansion of their asset base, generate stable revenue and pay a growing dividend. The portfolio mixes its defensive and growth holdings according to the economic or business cycle and is mainly invested in the developed markets, especially North America.
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