As high-net-worth investors and their advisers discover the merits of real assets, they are also recognizing infrastructure investments can offer attractive risk-adjusted returns, yield and diversification. And investors are taking note of the potential role for listed infrastructure.
The most obvious feature of listed investments compared with unlisted is the flexibility afforded by liquidity. Benjamin Morton, senior vice president and infrastructure portfolio manager for Cohen & Steers, says the benefits of liquidity of the listed sector are clear to investors. Quite simply, liquidity provides investors with a more flexible way to implement and manage their infrastructure exposure.
And it is true, global listed infrastructure has performed well against the broader global equities market over various time periods since the inception of the earliest related index — the UBS Global Infrastructure & Utilities 50-50 Index. And it has delivered those solid returns at a lower volatility than other equities. The listed sector also has low correlation with bonds and relatively low correlations to global equity, especially if you accept the argument that the sector behaved differently following the 2008 financial crisis when it, along with a lot of other asset classes, was more highly correlated as all but the safest of havens plunged.
The active portfolio management that is possible with stocks can also, at least theoretically, lead to higher returns, either through capturing upside or mitigating downside. “One of the benefits of listed [infrastructure] is that we can be a bit bolder and respond more quickly to some of the volatility, whether it is in reaction to GDP, regulation or governmental changes,” says Larry Antonatos, director and product manager, global equities, with Brookfield Investment Management. “We can be more dynamic.”
Another obvious example of the benefit of listed versus unlisted infrastructure investing is the ability to reduce exposure to trouble spots as they arise. One of the most prominent, and underestimated, risks in infrastructure investing is changes in political or regulatory regimes, says Jeremy Anagnos, managing director and senior portfolio manager, infrastructure, at CBRE Clarion Securities. There is a perception that investors accept limited upside inherent in regulated cash flows in return for an equivalent protection on the downside. That is not entirely true.
“There is downside risk,” he says. “Regulation or governments can and, more often than not, do change. And when the terms of the game change from what was underwritten, outcomes can be severe.”
Anagnos cites the pronounced, negative impact of retroactive regulatory reforms to the energy sector in Spain in 2013 as an example. “Some of the most important elements of infrastructure investments are things that governments can change,” he says. “Exposure to listed infrastructure allows investors to alter their holdings as those changes take place.”
Morton adds that it is often possible to achieve more targeted exposure with listed infrastructure: “There is access to a broad range of subsectors in many different regions. It can be difficult, for example, to gain meaningful access to Brazilian toll road investments in an unlisted vehicle.”
Listed is infrastructure
One of the main draws of unlisted infrastructure is infrastructure’s power as a diversifier, Antonatos says. “So many investment opportunities are closely tied to the ‘markets’ — whether it be GDP, supply and demand forces, or interest rates,” he says. “Since most infrastructure is regulated in some way, it effectively reduces exposure to ‘market’ risks and in favor of regulator risk. The underlying cash flows of infrastructure are fundamentally different.”
The fact that the infrastructure is in a publicly traded “wrapper” doesn’t change that fact, Antonatos explains — investors in pure-play listed infrastructure vehicles are buying similar cash flows to unlisted investors. The “pure-play” infrastructure distinction is important. Pure-play infrastructure companies derive the majority of their cash flow from the operation of infrastructure assets, not from closely related businesses such as construction, engineering or materials.
Anagnos says many investors have turned away from the listed sector in the past due to confusion over the pure-play universe. “There has been some misunderstanding that these stocks are just utilities, which is really not the type of exposure that they are looking for,” he says. “In reality, the listed infrastructure universe is broad and diverse with tremendous exposure to all sectors, with the possible exception of greenfield and J-curve assets.”
Cohen & Steers’ Morton states it simply: as long as it is of the pure-play variety, “listed infrastructure is infrastructure.”
Tyson Freeman is a freelance financial writer based in Healdsburg, Calif.