Infrastructure Evolution
August 27 2009Caroline Munro, Financial Planning
In the 2009 Budget and as part of its Nation Building Program, the Australian government pledged $22 billion towards infrastructure. Infrastructure investments across the world are benefiting from similar action by governments that are waging an economic war against the global financial crisis.
For retail investors, the run-on benefits from new and exciting projects, like renewable energy and clean technologies – which recently received a boost at the G8 summit in Italy – may only come some way down the line. In the meantime, increased production and construction will result in a brighter outlook for companies in various sectors. And infrastructure remains an exciting area, where growth and financial product development will create many opportunities for investors.
Infrastructure investments were not immune to the market volatility of the last year. Year-on-year performance of the benchmark UBS Global 50-50 Infrastructure & Utilities Index (AUD Hedged) as at 31 May 2009 was -31.91.
Listed infrastructure was severely affected by the market volatility due to its higher correlation to global equity markets than unlisted infrastructure. This has led to the question: is it still considered a defensive asset class?
“I can understand that some financial advisers and retail investors are skeptical about the infrastructure asset class because some of the stocks in Australia have performed so poorly,” said head of global listed infrastructure at Colonial First State, Peter Meany.
“But I think you’ve got to separate the capital structure and the governance issues that those stocks had from how the underlying assets actually performed. And the assets are doing just fine.”
However, Ross McInnes, director of investments at Australian Investment Research Services, said that the asset class is no longer the straightforward defensive asset class it once was. He said you can no longer give the blanket term of ‘defensive’ to an asset class that is set to evolve dramatically over the next few years, and a number of assets within the class should be considered as ‘growth’.
“I think it’s important to know that the asset class is broader than your traditional infrastructure, and there are growth and defensive assets within that broader group of infrastructure,” he said.
“I think infrastructure can be seen as growth assets as well, very much so.”
As an example of this, McInnes said that while the Australian government has upped spending on infrastructure to boost the economy and create jobs, climate change is also at the top of the agenda. Looking at the fiscal policy over the last six months, he said it is important to note that investment in infrastructure incorporates green technology and renewable energy.
The Australian 2009 Budget has set aside $3.565 million for clean energy infrastructure, and the leaders at the G8 summit agreed on a goal of reducing glob al emissions by at least 50 per cent by 2050 and on an 80 per cent or more reduction goal for developed countries by 2050. The leaders discussed the role of innovative technologies and climate change financing.
“Even though it’s early days, we are starting to research that area pretty heavily because we think there’s going to be a lot of corporate M&A activity and a lot of things happening in that area,” said McInnes.
“From that aspect, infrastructure is going to be generating growth opportunities for investors as well.”
He said infrastructure now has a broader scope than your traditional assets around toll roads, railways and so forth.
“The renewable energy side of it is something that every government in the world is looking at,” he said. “When someone says infrastructure is a defensive asset, I think they’re just looking at one aspect of it. And as with any other new industry that starts up, some companies may fail. You have to take a portfolio approach and you wouldn’t put a large allocation of your client’s money into it at this point until it matures.”
Meany agreed that there are exciting developments but maintains that infrastructure can generally be considered defensive.
“There are some opportunities that really interest us,” he said. “The renewable energy side, if you can get it on a contracted basis – for example, a wind farm contracted to a utility – will make for a more stable income stream. We like some of the smart metering initiatives. If you’ve got an electricity transmission or distribution business, and the government is providing a fixed return on capital for rolling out more energy-efficient meters, then clearly they get the growth from that but also the regulated return.”
He said there are plenty of opportunities for retail investors, but they must consider their reasons for investing in the asset class.
“They just have to be careful that in chasing a theme, you don’t move too far away from the core reason for being in the sector, which is defensive growth,” said Meany.
“If you are getting too caught up in construction activity, or in emerging markets because there’s huge growth potential, you’re moving away from what investors were probably interested in in the first place, and that’s a more defensive income stream.”
Considering the performance of global listed infrastructure throughout the downturn, Lonsec senior investment analyst Feriel Aumeerally said the underlying asset has demonstrated that it is a defensive asset class because the earnings are still predictable. She added that Australia’s situation is different to other countries in that infrastructure companies were highly geared, but they have successfully engaged in capital raisings.
She said while infrastructure equities behaved in much the same way as any other equities, the underlying earnings of global infrastructure have not changed and therefore infrastructure as an asset class is still considered defensive.
“It still caters for long-term investment,” she said. “There were reasonable concerns around gearing and the companies in Australia have gone out to the market to reduce their gearing.”
Matthew Dell, the head of retail distribution for specialist infrastructure invest mentmanager, RARE Infrastructure, agreed.
“We would say that it still is very defensive in terms of the revenues of the companies that we’re investing in tend to be resilient across economic cycles,” he said. “The earnings hold up even in a downturn like this, and that is in contrast to industrial stocks or property stocks, which ebb and flow with the economic cycle.”
Dell said in the context of alternative energies and clean technologies, and the increasing spectrum of the companies getting involved in this growing area, he doesn’t see much change from their perspective.
“Those companies fall into our universe as well – we cover companies that are into renewable energy sources and we also find that the current companies we cover are looking at alternative energy sources in addition to the traditional energy sources.”
