Deputy Head of Global Listed Infrastructure, Andrew Greenup, tells Livewire the most compelling reasons for investors to consider listed infrastructure as part of their portfolios, some common misconceptions, and shares a high conviction stock pick; the world's largest renewables owner.
1. What are the most compelling reasons for investors to consider global listed infrastructure as part of their portfolio?
Global listed infrastructure looks to protect and grow capital while producing an attractive dividend yield for investors. Infrastructure assets like toll roads, airports, railways, sea ports, utilities, pipelines and mobile towers provide essential services. They typically exhibit high barriers to entry, inflation linked earnings, structural growth drivers and highly predictable cash flows in an increasingly uncertain world.
The most compelling reasons to consider global listed infrastructure as part of a portfolio are:
- In a low interest rate environment, global listed infrastructure provides a strong dividend yield of between 3.5% and 4.0%, with dividends forecast to grow at between 4% and 6% p.a.
- Infrastructure assets can often increase prices without destroying demand, owing to their essential service nature.
- Earnings are driven by structural demand (replacement of aged assets, catch-up of historic underinvestment, urbanisation, congestion relief, advances in mobile communications, renewable energy) and are not reliant on economic growth.
- Voters in both developed and developing worlds are demanding improved infrastructure. This is generally leading to bipartisan support (in an increasingly partisan political world) for additional investment into infrastructure projects, to improve lives and increase productivity. This is creating significant growth opportunities for listed infrastructure companies.
- Adding global listed infrastructure to an investment portfolio provides diversification benefits and reduces correlations of returns.
- Global listed infrastructure can expand the investment opportunity set by providing exposure to high quality assets not found in a typical Australian or global equities fund (for example: mobile towers; freight railways; oil and gas pipeline, storage & export firms)
These factors equate to a relatively low risk investment proposition that offers both inflation linked income and structural earnings growth.
Listed Infrastructure Performance
Source: Bloomberg and First State Investments. Data as at 30 June 2019.
2. Please share two or three common misconceptions that you hear from individual investors or advisers about investing in global listed infrastructure.
“Haven’t I missed this given how well the asset class has done? Isn’t the sector expensive?”
No. The asset class has performed well, in part aided by low interest rates, but that does not in itself make the sector expensive relative to other investment opportunities. Global infrastructure is delivering strong earnings growth which, when combined with lower discount rates (from falling interest rates), means that intrinsic asset values have also increased meaningfully. Despite delivering a double digit returns for the last decade, dividend yields for global listed infrastructure have remained in the 3%-4% range and are underpinned by reasonable payout ratios (~70%) and robust company Balance Sheets. In fact, in the last quarter alone, pension funds and unlisted infrastructure funds have aggressively bid for listed infrastructure firms and assets (Buckeye Partners, El Paso Electric, Genesee & Wyoming, Ausol) at prices well above where the listed sector is trading.
“Isn’t infrastructure just a low growth, bond proxy investment?”
No. Infrastructure assets offer defensive, non-cyclical growth opportunities from a variety of areas. These include:
- investment-driven earnings from the build-out of new transmission and distribution assets by electric, gas and water utilities
- clean renewable energy replacing carbon emitting, coal-fired electricity generation
- increasing equipment on mobile phone towers, to cope with growing data usage on smartphones
- rising traffic volumes on toll roads, as a result of urban congestion
- structural growth in global travel driving more passengers through airports and
- new energy pipelines and storage infrastructure being built to facilitate the world’s changing patterns of energy supply and demand.
To be clear, global listed infrastructure is an interest rate sensitive asset class (and I don’t profess to know the future direction of rates) but it also has defensive growth attributes.
“Don’t I get exposure to global listed infrastructure via my global equities allocation?”
A little bit - but not very much. We estimate that listed infrastructure companies account for between 2% and 4% of global equity portfolios. Hence, if you decide global listed infrastructure suits your investment needs, then you need to make an explicit allocation in your investment portfolio in order to gain a meaningful exposure to the asset class.
On the ground due diligence in Florida
Source: First State Investments
3. Could you share a global listed infrastructure opportunity that you think offers an attractive investment proposition today? What are the attributes that make the investment so attractive?
NextEra Energy (NEE US) is a Florida based electric utility, and world’s largest renewables owner. For context, NEE produced 47 terawatt hours (TWh) of renewable energy in 2018. In comparison, the whole of Australia produced 28TWh of energy from renewable sources over the same period. This high quality company has a strong management team and a high growth utility service territory with a constructive regulatory environment, as well as being the US’ largest wind and solar owner.
The declining cost of wind, solar and battery storage gives NEE significant value upside optionality, as the expanding renewables industry disrupts the conventional coal and nuclear (and eventually natural gas fired) electricity generation industries over the next decade.
With battery storage close to being – or already - economically competitive, the ability to store intermittent electricity generation from renewable sources will only accelerate the virtuous circle of declining costs and expanding market share of renewables. As the US industry leader in this space, NEE has a large competitive advantage. The company is forecast to deliver earnings growth per share of between 6% and 8% per annum over the next 3 to 5 years, with a dividend yield of between 2.5% and 3.0%, and is well placed to benefit from future advances in renewable energy.
Least expensive technology for generating electricity, by county
Notes: Assumes a 7% discount rate for borrowing capital. Data not available for Alaska and Hawaii. Source: University of Texas at Austin Energy Institute. Data as at October 2018.