Why global infrastructure might bounce back
Global infrastructure stocks may provide an investment opportunity in the months ahead, and a bevy of Australian domiciled funds offer a means to tap into the potential long-term gains.
The traditional argument for including infrastructure in diversified portfolios, is that it has a low correlation with other asset classes, which means it can buoy returns when other sectors are flagging. Fund managers now also point to dynamics expected to provide a tailwind to the sector as further justification for adding it to client holdings.
“We are looking for infrastructure assets to be solid performers during 2024 as infrastructure underperformed the broader indices last year. In the last quarter of 2023, the sector had already bounced back by more than 8%,” says Jamie Hannah, Deputy Head of Investments & Capital Markets at VanEck.
“The largest sector within infrastructure, utilities’ was largely flat last year but we should see solid momentum build as the companies within it provide the essential services that make up the backbone of the global economy,” Hannah says.
Secular trend tailwinds
The global transition to net zero economies is a key factor expected to underpin performance as ageing utilities are replaced with the clean energy sources, that are likely to become commonplace in the decades ahead.
Existing companies in the space are best placed to win this new business and ultimately benefit from the significant investment required to build new energy infrastructure, argues Hannah.
Fund manager Ausbil, believes current valuations also fail to reflect the long-term benefits from other secular growth themes; such as the transition from 4G to 5G mobile phone technology, or the benefits of electrification and artificial intelligence on power distribution and demand.
“Our outlook for return on equity invested in infrastructure is rising with the stronger cash flows from the impact of inflation, and the more normalised rate environment which we have entered,” Ausbil’s global listed infrastructure team recently wrote.
“Sectors of particular interest include regulated water utilities, electrical utilities and mobile phone towers. We believe that some key infrastructure assets from these sectors may offer upside potential last seen in the pandemic storm brought on by COVID-19.”
Infrastructure funds on offer
Several funds on the ASX provide a route into the global market by offering diversified portfolios of listed infrastructure equities.
Vanguard’s $316 million Global Infrastructure Index ETF (ASX: VBLD) aims to provide low-cost access to infrastructure securities listed in developed countries by tracking the FTSE Developed Core Infrastructure Index. It has 135 holdings spread mostly across the US and Canada (82.5% of its portfolio), with assets in 15 other countries making up the difference.
Its biggest sector allocation is conventional electricity (33.8%), followed by railways (21.1%) and pipelines (14.8%).
VanEck’s $761 million FTSE Global Infrastructure (Hedged) ETF (ASX: IFRA) offers a partly currency hedged version of the same market by tracking the FTSE Developed Core Infrastructure 50/50 Hedged into Australian Dollars Index.
In terms of active funds, Argo’s Global Listed Infrastructure (ASX: ALI) is a $400 million high conviction fund that seeks to benefit from growing demand for infrastructure investment and continued privatisation of government owned assets and services. Portfolio manager Cohen & Steers diversifies holdings across 50-100 listed infrastructure securities in both emerging and developing economies with its top holding including US clean energy company NextEra Energy, Australian toll road operator, Transurban and Mexican airport operator, Grupo Aeroportuario De Sur-B.
Argo’s fund has returned 7% per annum since its inception in July 2015 and at February 2 traded at $2.08 versus its net tangible assets per share of $2.31.
Another listed fund is Magellan’s $680 million Infrastructure Fund (Currency Hedged) (ASX: MICH).
Drilling down for higher conviction
In terms of specific holdings, Lazard Asset Management identifies Europe as a region with the potential to outperform others.
“We see some pockets of attractive value opportunities, particularly in Europe. Inflation has been running strong in most developed countries, resulting in increases in interest rates from historic lows. High bursts of inflation have positive cashflow implications for toll roads, airports, railways and non-US utilities,” says Warryn Robertson, Portfolio Manager for Lazard’s Global Listed Infrastructure Fund.
“In contrast, the implications of higher inflation for US utilities are likely negative. We remain cautious on the US utilities sector as a whole. That said, we are beginning to see some specific stock opportunities within the US utilities sector,” Robertson says.
Lazard’s favoured stocks include UA freight railroad operator Norfolk Southern, global toll road and airport operator Ferrovial and UK regulated utility giant National Grid.
After a tough 2023, global infrastructure may be worth a closer look, particularly if the holy grail of a soft economic landing eventuates.