A closer look at infrastructure yields
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Christine St Anne is Morningstar's online editor.
Infrastructure investments have often been touted as offering high, stable income. The general predictability of long-term cash flows and earnings from infrastructure assets such as toll roads, utilities or airports should translate into higher yields compared to other assets.
Given the hunt for yield is more ferocious than ever, Morningstar took a closer look the income traits behind these funds its recent report on global infrastructure investments.
"We looked at global infrastructure in two ways," Morningstar fund research analyst Kathryn Young says.
"Firstly, we looked at the aggregate portfolio and tracked the aggregate yield generated by the stocks in the portfolio over time. Then we looked at the income distributions that these funds have paid over that period," Young says.
The report looked at the portfolios of seven global infrastructure funds over the last four years. The analysis found that on average these delivered around a 4 per cent yield - 2 per cent higher than global equities.
Dividend yields from these funds were also slightly higher than the global listed property sector. The result is not surprising given that global listed property suffered big dividend cuts and recapitalisations in the wake of the 2008 meltdown.
Despite the attractive yields on offer, Young says it is important to keep global listed infrastructure yields in perspective, as these yields were based on valuations.
The same analysis conducted on the seven funds also looked at global equities and global listed property indexes. In that analysis, dividends across infrastructure, property and global equities fell in recent years, reflecting the rising valuations and risk appetite.
Young says capital gains or losses - from the stocks in the portfolio - can also impact a global listed infrastructure fund's total return, including the dividend yield.
This was most evident in 2009/10 when global infrastructure companies' returns exceeded their dividend yields as risk aversion fell and investors sought good companies with higher yields.
This variability in capital return is linked to equity market volatility that comes with being a listed company.
"Expecting a certain income level to persist indefinitely into the future is hazardous," Young says.
The next piece of analysis conducted by Morningstar found the higher-yielding stocks held in the portfolios did not necessarily translate into distributions to investors.