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A case for investing in infrastructure securities

Arian Neiron  |  26 May 2016Text size  Decrease  Increase  |  

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Arian Neiron is the managing director of VanEck Australia. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.

 

In 2016 global infrastructure has been one of the best performing asset classes, returning 7.34 per cent. While performance is strong, very little is known about this asset class, which can offer investors stable income and diversification in terms of both exposure and low correlation to other asset classes.

 

What are global infrastructure securities?

Infrastructure securities are the listed equity securities of companies active in the business of building, maintaining and operating structures, networks and facilities that are needed for a society to function and an economy to prosper.

These can include companies that build roads, railways and bridges, as well as toll operators, airport operators, telecommunication network providers, satellite operators and companies involved in the storage of oil and gas.

Infrastructure securities differ from real estate securities in that there are high barriers to entry. There are limited places where a rail can be laid or a bridge can be built, and therefore the prices that operators can charge for using the assets may be set by government regulation rather than allowing the operators to use monopoly-like powers.

While pricing power is diminished, the benefit of no competition is significant, resulting in a much more stable income stream for investors compared to the earnings volatility of other equity investments.

Contributing to this stability of income is the inelasticity of demand for the use of infrastructure assets. Infrastructure securities provide essential services such as major roads and household energy, therefore consumption varies little in response to price or the economic cycle.

 

Global infrastructure companies benefit from falling interest rates and are inflation-agnostic

The developed world is currently in a prolonged period of low interest rates. When interest rates are falling, an investment in infrastructure becomes more attractive. It makes the cost of capital cheaper for companies looking to participate in large-scale projects and they are able to borrow at lower rates.

This means the return on investment for companies within the listed infrastructure universe increases, leading to greater net income and higher yield for investors. Chart 1 shows the performance of the FTSE Developed Core Infrastructure 50/50 Hedged into A$ Index in comparison to the US 10-year Treasury bond yield.