Proponents of global listed infrastructure argue the sector provides a worthwhile counterbalance to parts of the share market that drove its gains over the past year, in particular US mega caps.

Its underlying characteristics – including predictable income, inflation protection, diversification benefits and attractive valuations – are argued to make the asset class a compelling investment in today’s environment.

Global listed infrastructure already appears to have garnered interest from financial advisers in the closing quarter of 2024, with an analysis of a large cohort of AUSIEX trading showing buy trade value by advisers for the Q2 ending December 2024 was 58% higher than the previous quarter, boosted by significant investor interest in Transurban (ASX: TCL).

In this Q&A, AUSIEX asked Warryn Robertson, Portfolio Manager and Analyst at Lazard Asset Management, to give his views on the outlook for the sector in 2025 and to identify companies which might offer the best opportunities. 

Lazard’s Global Listed Infrastructure Active ETF (Cboe: GIFL) is one of several specialist funds available to local sharemarket investors, alongside others such as Vanguard’s Global Infrastructure Index ETF (ASX.VBLD) and Argo Global Listed Infrastructure (ASX: ALI). Global X, VanEck, iShares by BlackRock and Magellan Financial Group also offer listed funds in the space.

How did listed global infrastructure perform in 2024?

Our own fund delivered a total return of 5.9% net of fees for 2024. This return was slightly below our objective, which is to achieve a total return of inflation (as measured by CPI) plus 5% over rolling 5-year periods. It was on track for another solid year of high-single digit performance (which is what we’d typically expect from this asset class), until a tough fourth quarter impacted the fund. 

Part of the reason for this softening of performance was heightened concerns around sticky inflation numbers and the risk the interest rate outlook may not be as dovish as market participants had hoped. 

More interesting was the strength of the broader global equity markets (as measured by the MSCI World Index) which returned more than 30%. 

Investors looking at comparing these relative returns should not get caught up in irrational exuberance and chase those kinds of returns. Clearly there is fever around AI and the type of stocks we invest in does not play directly into this dynamic. That has been a drag over the past 12 months, but it may prove beneficial to investors if that momentum reverses. 

At a region and sector level, the best performing region was North America, and the best performing sectors were utilities (diversified, gas and electric utilities). As a bottom-up, benchmark agnostic manager, we continue to view these businesses with caution and do not hold many of these stocks, given the over-valuation we see, especially in US utilities. 

What is the forecast for the sector in 2025 – and why?

We don’t typically like to predict a one-year return, I have been doing this long enough to know I can’t predict the market over any short-term horizon. Over a rolling five-year period, we do believe we can meet our objective of CPI + 5% and that is how potential investors should look at the asset class. 

On a valuation basis, listed infrastructure is more attractive than broader equity market cap indices, most notably US mega caps. The caveat is you need to be concentrated in the right infrastructure stocks. Many infrastructure stocks have some genuine valuation issues or threats to the sustainability of their revenues. 

Our investment process has led us to invest in well-regarded European and UK infrastructure stocks, which we see as compelling on a valuation basis against more expensive stocks, especially those in the US.

We currently see selective opportunity in European-listed toll roads, UK water utilities, US railroads and satellite companies. And while overall we do see the US as expensive, we’re beginning to see opportunities within the US utilities sector. 

We’ve also recently invested in a number of airports, with pre-COVID-19 passenger numbers returning and, in some cases, exceeding forecasts, specifically within tourist/holiday destinations. To that end, buying into European airport operators such as Aena has been a sound decision. Aena, which is minority owned by the Spanish government, has been the beneficiary of strong tourist numbers given its footprint in key holiday areas in both Europe and South America.

What is the investment case for holding global infrastructure in a portfolio?

Investing in infrastructure presents several compelling advantages, particularly in the context of current economic conditions and long-term trends. 

Predictable income and cash flow stability: Preferred infrastructure provides steady and reliable cash flows, often secured through long-term contracts or from using the essential life-critical services provided by these natural monopoly assets. This creates a predictable income stream that is less sensitive to economic fluctuations, making it appealing during uncertain times. The demand for essential services like electricity and water remains stable regardless of economic cycles, contributing to resilient cash flows.

Inflation protection: Infrastructure assets often have built-in mechanisms to pass through inflation costs to consumers, which helps maintain their profitability even as prices rise. This characteristic makes them attractive in inflationary environments. We often refer to preferred infrastructure as the “inflation linked bond with rising coupons”. 

Diversification and downside mitigation: Investing in infrastructure offers diversification benefits, as these assets are generally less correlated with broader equity markets. This can help mitigate risks during periods of economic downturn or volatility. Infrastructure investments are seen as a defensive strategy that can outperform other asset classes during challenging economic conditions.

Structural growth drivers: Trends such as decarbonisation, digitalisation, and deglobalisation are driving long-term demand for infrastructure investment. As societies transition toward renewable energy sources and digital technologies, investments in related infrastructure are expected to grow significantly. Moreover, the growth of any modern society is predicated on the increased demand for essential infrastructure assets thus creating a strong volume growth story.

Attractive valuations: After a period of underperformance relative to broader equity markets, many infrastructure assets are now viewed as undervalued. This presents an opportunity for investors to acquire quality assets at appealing prices, especially as interest rates may have peaked, potentially leading to improved performance in the sector.

Essential nature of infrastructure: Infrastructure is critical for societal functioning – providing essential services such as transportation, utilities, and communication networks. The ongoing global infrastructure funding gap highlights the need for private capital to support these essential services, further underscoring the importance of investing in this sector.

What are the risks for the sector in 2025?

One issue to be mindful of the expansion of the asset class into new or higher growth and potentially higher risk areas. We believe investors should invest in infrastructure for its predictability and consistency and we have a strict definition of the type of infrastructure we will invest in. One key aspect we look for when we look to “preferred infrastructure” businesses is to identify those that are geographic monopolies.

As an example, there has been a lot of publicity regarding some eye-watering valuations and transactions on data centres. Clearly this is a compelling investment theme and topical talking point given the digitisation of the economy and the AI thematic that has gripped our imagination (and investment market speculation) recently. 

As a general overview, a data centre is a specialised facility designed to house and manage computer systems and associated components, such as telecommunications and storage systems. It provides the necessary infrastructure for IT operations, including power supply, cooling, security, and network connectivity. Clearly, the computing power behind AI has made data centres significantly more important for many businesses. 

Yet, whilst it is often talked about as an “infrastructure” asset, we view this categorisation with caution and suggest that investors and clients be mindful of expecting the typical attributes of pure infrastructure. 

While on face value, the current narrative and appeal may be one of exponential promises of growth (and for this it might be better suited to another part of a portfolio, such as real estate or growth equities), we do not see the fundamental characteristics that align with our definition of “preferred infrastructure”.

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