One would be hard pressed to find an asset class of greater interest to investors these days than infrastructure, as people seek hard assets capable of performing well during times of rising inflation and interest rates. Indeed, other than during equity bull markets, infrastructure has delivered better returns by capturing more upside than bonds and less downside than either equities or bonds.
But infrastructure is a very broad collection of assets extending far beyond constant references to “roads and bridges.” Rather, it permeates virtually every aspect of our personal and professional lives and represents the circulatory and nervous system of modern economies.
One of North America’s biggest infrastructure investment managers is Brookfield Asset Management, which has invested more than $130 billion in the space and has a 120-year track record. Rob Bellinski and Leonardo Anguiano are executives in the organization’s Public Securities Group. Bellinski is an infrastructure investment specialist and senior analyst, and Anguiano is a managing director and portfolio manager.
How do you define the infrastructure investment universe?
Infrastructure is an amalgamation of industries, but the assets themselves share several common characteristics, including providing essential goods and services with generally inelastic demand, monopolistic properties, regulated or contracted revenue streams and a history of stable cash flows. The investible universe of listed infrastructure companies comprises four main sectors:
- Utilities, which are electric, gas, water and renewable companies
- Communications, which are primarily operators of mobile network towers, but also include operators of satellites and fixed-line networks
- Energy infrastructure, which are companies that transport and store hydrocarbons
- Transports, which are owners and operators of airports, toll roads, ports and railroads
Technological innovation and consumer demands are driving the next wave of infrastructure investment.
How is the renewables revolution influencing worldwide production and consumption of energy?
The ultimate target is to decarbonize the world, and this starts at power generation with the eventual electrification of society. Renewables are expected to represent the majority of the world’s sources of power generation by 2050. This will likely require $100 trillion of investment over the coming decades, across generation capacity, grid modernization and energy efficiency. The eventual proliferation of electricity storage, we believe, will drive the electrification of the global economy — electric cars and other means of transportation, decarbonization of industry, etc. — and improvements in battery technology and other storage solutions will be at forefront of this revolution.
What are the innovative solutions addressing urban congestion?
Mobility innovation is playing a larger role for many companies in our universe. One key area of investment is managed lanes in urban areas. Managed lanes are a “highway within a highway” concept that adds additional capacity to existing traffic corridors, while charging users a toll that escalates along with the current traffic conditions. These roads work as time-saving tool for users during hours of peak congestion. In the United States, we’ve seen these types of assets diminish congestion in the Dallas/Fort Worth and the Washington, D.C., metro areas, while also allowing infrastructure companies to earn an attractive return on their invested capital.
How are companies exploiting these trends?
Forward-thinking companies are capturing these opportunities by embracing these trends and investing in their assets to be competitive for the future. An example would be U.S. utility companies that are investing in cheaper and cleaner renewable sources of power generation to replace expensive and carbon-intensive coal plants. These companies are able to maximize their profit by taking cost savings from lower fuel and power costs and investing in their asset base to accommodate these renewable sources of generation via capacity additions, grid modernization and energy efficiency investments. As a result, the value of their assets increases, which is a key driver of earnings growth for utilities, as utilities earn a regulated return on invested capital.
How can investors capitalize on these themes in a single portfolio?
Listed infrastructure’s fundamental drivers (consistent cash flows, inelastic demand, insulation from inflation) have historically translated into favorable risk-adjusted returns for investors. We believe strongly in active management within this sector, as the innate regulatory environment can be highly complex given the global nature of our universe. As such, it’s important to invest with experienced professionals who hold a long-term view.