Close

At AlbaCore, we focus on the long-term. As one of Europe’s leading alternative credit specialists, we invest in private capital solutions, opportunistic and dislocated credit and structured products. 

Discover more
Close

Specialist in Asia Pacific, China, India and South East Asia and Global Emerging Market equities.

Discover more
Close

Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

Discover more
Close

Our philosophy is very simple. We are constantly searching for high quality businesses and when we acquire them, we will work relentlessly with them to create long-term sustainable value through innovation, ESG-led and proactive asset management.

Discover more

Listed infrastructure: Finding a port in a storm of rising prices

I recently returned from a two-week, coast-to-coast trip across the United States, talking to institutional clients, pension funds and investment consultants. The mood on the ground is one of caution. Rising inflation and interest rates are on everybody’s mind. A war in Europe and spiking oil prices are creating uncertainty. And the possibility of recession hovers at the edge of conversations. During such a period, it’s easy to wonder if there are any safe ports in the investment storm.

In this environment, we believe that infrastructure has an important role to play in portfolios. Investments in assets such as toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres show their worth in such times. These types of investments have high barriers to entry, structural growth and strong pricing power, giving them the potential to withstand inflation and generate consistent earnings, regardless of the broader economic backdrop.

With this in mind, below are three reasons we believe infrastructure investors may be well-placed to weather the geopolitical storms ahead. 

1. Infrastructure runs its own race

Recent performance has seen the asset class hold up relatively well as global equities sold off, consistent with its history of providing most of the upside in rising equity markets but offering protection from falling ones. This pattern of performance is underpinned by global listed infrastructure’s consistently strong pricing power, predictable cash flows, and relative immunity to economic cycles.

This ability to hold up in falling markets has enabled the asset class to generate higher returns than global equities over the past 20 years, with less risk, as measured by standard deviation of returns.

Global Listed Infrastructure relative risk/return

Source: Bloomberg and First Sentier Investors, Quarterly time series from 2002-2022

2. Infrastructure is a price maker, not a price taker

Global listed infrastructure has historically outperformed global equities against a backdrop of high inflation1. This is a reflection of the fact that infrastructure’s tangible assets provide essential services, using contracted or regulated business models. 

These assets consistently demonstrate the ability to pass though the effects of higher input costs and inflation, to the end user2. This can be achieved in several ways – for example by allowing utilities to earn regulated real returns; or via contracts which explicitly link tolls and tariffs to the inflation rate; or as a result of regional oligopolies’ robust industry structures allowing inflation pass-through.

Australian-listed Transurban*, for example, is a beneficiary of improving traffic volumes that have rebounded following the lockdowns of the last two years, while the concession terms on the vast majority of its road networks allow tolls to be raised by the rate of inflation3.  

Infrastructure’s capital-intensive nature provides high barriers to entry which have allowed incumbent operators in other sectors, such as mobile towers and freight rail, to achieve similarly robust pricing results even without explicit inflation links. Our analysis has found that more than 70% of assets owned by listed infrastructure companies have effective means to pass through the impacts of inflation to customers, to the benefit of shareholders. This number is closer to 80% for our portfolio today4.

Further, the value of infrastructure assets can generally be expected to rise during inflationary environments. Existing infrastructure assets become more attractive as the replacement costs increase. This factor gives infrastructure assets enhanced appeal during periods of high inflation.

3. Infrastructure taps into the big themes

Many of the mega-trends shaping today’s world have infrastructure at their heart. Decarbonisation is a good example – as the world looks to reduce greenhouse gas emissions, we need more renewable energy generation, distribution and storage facilities. Similarly, the growth of electric vehicles demands widespread electrification and public charging infrastructure, which investors can support by allocating capital to its development.

Midwest US electric utility Xcel Energy has been one of the most active electric utilities in the US transport electrification space. It plans to invest around US$2 billion to support 1.5 million electric vehicles by 2030, through infrastructure such as charging stations and grid upgrades5.

The move to renewable energy is reshaping the dynamics of the utilities sector, which has traditionally been seen as a defensive but typically lower-growth segment of the market. However, these types of assets, which account for around half of the listed infrastructure opportunity set, are now seeing a shift driven by the investment opportunities presented by the build-out of renewable energy. Some utility companies are ramping up annual earnings growth forecasts from a 4-6% range to 5-7% or even 6-8%.

For example, Texas-based CenterPoint Energy is focused on achieving its net-zero goals by 2035 by building out its renewable resources and retiring coal plants. The company now expects to grow earnings per share by between 6% and 8% each year between 2022 and 2030, as it earns a return on the extensive work that it will carry out in this area6.

Digitalisation is another key theme. Ever-increasing demand for wireless data / connectivity continues to underpin steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. The changes required during the pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.

While global markets remain unpredictable, we are confident in global listed infrastructure’s ability to benefit from these structural themes over the long term.

* For illustrative purposes only.   Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.  Companies mentioned herein may or may not form part of the holdings of First Sentier Investors.

  1. Source: First Sentier Investors and Bloomberg, as at 26 May 2022
  2. Source: First Sentier Investors.
  3. Source: Company presentation
  4. Source: First Sentier Investors
  5. Source: company website
  6. Source: company website

Important information

This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 and as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act”). It is not to be distributed to the general public, private customers or retail investors in any jurisdiction whatsoever.

This presentation is issued by First Sentier Investors (US) LLC (“FSI” or “First Sentier Investors”), a member of Mitsubishi UFJ Financial Group, Inc. (”MUFG”), a global financial group. The information included within this presentation is furnished on a confidential basis and should not be copied, reproduced or redistributed without the prior written consent of FSI or any of its affiliates.

This document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results. This material is provided for information purposes only and does not constitute a recommendation, a solicitation, an offer, an advice or an invitation to purchase or sell any fund and should in no case be interpreted as such.

Any investment with First Sentier Investors should form part of a diversified portfolio and be considered a long term investment. Prospective investors should be aware that returns over the short term may not be indicative of potential long term returns. Investors should always seek independent financial advice before making any investment decision. The value of an investment and any income from it may go down as well as up. An investor may not get back the amount invested and past performance information is not a guide to future performance, which is not guaranteed.

Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon First Sentier Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Actual returns can be affected by many factors, including, but not limited to, inaccurate assumptions, known or unknown risks and uncertainties and other factors that may cause actual results, performance, or achievements to be materially different. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will continue, and First Sentier Investors undertakes no obligation to publicly update any forward-looking statement.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of FSI.

The comparative benchmarks or indices referred to herein are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.

Apart from First Sentier Investors, neither the MUFG nor any of its subsidiaries are responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any fund or the repayment of capital by any fund. Investments in a fund are not deposits or other liabilities of MUFG or its subsidiaries, and the fund is subject to investment risk, including loss of income and capital invested.

For more information please visit www.firstsentierinvestors.com. Telephone calls with FSI may be recorded.