Key Points
• Global listed infrastructure offers access to assets with high barriers to entry, pricing power, and long-tail cash flows.
• The infrastructure asset class comes with inherent inflation hedging characteristics.
• Australia now has very few listed infrastructure assets, compelling investors to seek opportunities in global essential infrastructure.
Infrastructure is a compelling asset class for the consistent and dependable yields it can generate. It generates this income from assets that enjoy significant barriers to entry, very long cash flow, and that are usually the providers of essential services like water, transport, telecommunications and energy transmission that continue to be utilised whatever the prevailing economic situation.
Ausbil’s Global Essential Infrastructure team share their views on the sector, and talk about the powerful yield the asset class generates, how it performs in an inflationary environment, and why an active approach can be beneficial.
Q: What are the characteristics of Essential Infrastructure?
A: The Essential Infrastructure universe, under Ausbil’s tight definition, comprises the assets that are essential for the basic functioning of a society, as illustrated in Figure 1. They are typically regulated or have a track record of very stable cash flows through the economic cycle. In our definition, Essential Infrastructure typically comprises monopolistic, regulated or long-term contracted assets, predominantly found in regulated utilities (electricity, gas and water), regulated or contracted pipelines, toll roads, airports and mobile phone towers.
Figure 1: Defining infrastructure: Caveat emptor, buyer beware
Source: Ausbil.
Under Ausbil’s definition of Essential Infrastructure, the vast majority of an investment’s cash flow must come from infrastructure activity. Essential infrastructure carries minimal greenfield risk, ideally has no immediate competitors (and low bypass risk), has non-cyclical cash flows, and assets typically have negligible or appropriately low demand risk.
Moreover, Essential Infrastructure in the context of this paper is limited to defining assets in developed markets. Assets with Essential Infrastructure characteristics in emerging markets are considered to carry political and regulatory risk that adds extra uncertainty and other layers of risk that are not deemed appropriate for the definition of Essential Infrastructure, especially in regard to its defensive characteristics and a focus on downside protection.
Q: What type of return does infrastructure offer investors?
A: Essential Infrastructure offers a compelling mix of yield, relative stability and long capital growth in the returns it offers investors. On the income or yield side, listed global Essential Infrastructure assets demonstrate strong yield outperformance across most periods when compared to US government bonds also consistently offer a significantly higher yield than global equities, as illustrated in Chart 1.
Chart 1: The relative yield of essential infrastructure compared to 10-yr bonds
Source: Ausbil, Bloomberg.
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