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How to diversify your portfolio: Global infrastructure

Lex Hall  |  10 Aug 2018Text size  Decrease  Increase  |  
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"You and I come by road and rail," Margaret Thatcher once quipped, "but economists travel on infrastructure."

The iron lady's subtle plea for plain English was not lost on the Conservative Women’s conference she was addressing.

But while infrastructure may sound like a dry word reserved for technocrats, in the mind of the investor it’s synonymous with tangible assets, predictable cash flows and steady returns.

"Infrastructure is the physical backbone of modern societies," says Matthew Landy, portfolio manager/analyst on Lazard Asset Management's Global Listed Infrastructure Fund.

"We all use infrastructure assets every day of our lives. Whether you're cooking dinner on a gas stove, you’re driving to and from work on a toll road, you’re turning on the lights when you get home from work or you're flying to another city from an airport."

Because of their essential role in society, infrastructure companies are typically monopolies with no competition. They are typically regulated and the demand for their services persists regardless of what’s happening to the economy, Landy says.

During the 2008 global financial crisis, for instance, overall earnings of infrastructure companies in the developed world fell by just 10 per cent, whereas general equities posted a fall of 60 per cent, according to Colonial First State Global Asset Management.

"All of that means that infrastructure returns are relatively stable and defensive," Landy adds.

And when governments seek to boost economic growth they look to spending on infrastructure. It’s estimated that spending on required infrastructure in both developed and emerging economies could top $50 trillion by 2030, according to Van Eck Investments.

Infrastructure spending is a pressing concern in Australia, too, amid growing congestion and rising populations.

airport infrastructure

Infrastructure, such as aiports, can act as a hedge against inflation

Airports are also a key feature of the infrastructure landscape. Morningstar director of equity research Adam Fleck sees good opportunities for Auckland Airport (AIA), which derives its revenue from aeronautical operations and other streams such as retail and logistics.

"Auckland Airport has carved out a wide economic moat because it is a near monopoly operating in a favourable regulator environment," Fleck notes. "We forecast solid returns on capital over the long run."

Another advantage of infrastructure is that it can act as a hedge against inflation as rises in CPI are often automatically passed through to users. When the CPI rises, so do tolls.

"It doesn't matter whether inflation is 1 per cent, 5 per cent or 10 per cent that inflation will be passed through into prices automatically," Landy says. "Should inflation rise, infrastructure assets should fare relatively well." 

Among Morningstar's list of best ideas in this asset class is Lazard Management's Global Listed Infrastructure Fund. As Morningstar analyst Anshula Venkataraman notes, it favours monopolistic industries in countries with sound economies and legal systems, and limits its pool of stocks to 95 out of possible 400, focusing on long-term value with a stated long-run goal of "inflation plus 5." 

Some Morningstar fund ideas on how you can gain exposure to global infrastructure include:

Lazard Global Listed Infrastructure

An excellent team and a time-tested approach make Lazard Global Listed Infrastructure a standout option in this space. Lazard defines its "preferred infrastructure" universe to include companies that have monopoly characteristics, high revenue certainty, strong profitability, and long-life assets. We like this definition of infrastructure, which the team uses to engage in extremely thorough fundamental research designed to identify undervalued preferred infrastructure companies that operate in developed economies. Minimum investment $20,000. (Anshula Venkataraman)

Magellan Infrastructure | Global Listed Infrastructure 

Magellan Infrastructure is an outstanding strategy. The conservative approach, long-term mind-set, and best ideas portfolio will serve investors well through the cycle. Magellan’s investment process applies a conservative, relatively strict definition to infrastructure, which results in a benchmark-agnostic concentrated portfolio. To be included in the team’s universe, a company must own an asset essential for the efficient functioning of society and the earnings must have limited sensitivity to competition, commodity price, and sovereign risk. Minimum investment $10,000. (Sarah Fox)

Auckland Airport

Auckland Airport is the largest airport in New Zealand, and most visitors pass through its doors. It handles over 10 million international passengers and nearly nine million domestic passengers a year. We believe the company has carved a wide economic moat as it is a near-monopoly operating in a favourable regulatory environment. Risks to returns are minimal, but largely revolve around a slowdown in tourism and traffic, given the substantial fixed asset base and plans for further sizable capital investments. On balance, Auckland Airport benefits from substantial competitive advantages, and we forecast solid returns on capital over the long run. AIA is currently trading at $6.20, slightly below its fair value estimate of $6.80. (Adam Fleck)

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Lex Hall is a Morningstar content editor, based in Sydney.

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