Investing in infrastructure during COVID-19: is it risky?
Infrastructure assets include what we would describe as assets essential to a properly functioning economy - think airports, toll roads and utilities. These are capital-intensive assets that are long-dated and exhibit highly predictable cash flows. For these reasons they are considered defensive.
The virus has laid bare several issues and one of them, in our view, is the defensiveness of some asset classes. COVID-19 is no ordinary exogenous shock. It has brought the global economy close to a stop or, in some regions, a complete shutdown.
Infrastructure has not been spared in the selloff. For the first quarter of 2020, listed global infrastructure (hedged) is down about 19%, the S&P/ASX 200 Index down about 23% and global equities (hedged) also down about 23%.
Within the infrastructure asset class, utilities and communication have significantly outperformed airports and toll roads. Toll roads and airports have been the hardest hit as governments around the globe moved to shutter their economic activity and movement of people. This has seen a significant fall in consumer traffic (passenger and vehicle).
However, we would caution investors against extrapolating this extraordinary trading environment into perpetuity, as mobility will eventually return and people will go back to work.
Essential part of the future
As difficult as it may seem right now, the global economy will not remain shut (that is, people confined to their homes) indefinitely. We know governments want to get their economies back up and running.
There is already an opinion forming at the highest levels to restart economies in regions less impacted by the contagion or still active but with strict preventive measures in place.
Traffic, you would suspect, would be among the first to start normalising, especially since social distancing is likely to remain with us for longer and, in this case, people are more likely to use their cars than public transport.
This is supported by the experience in China, with highway traffic rebounding faster than public transport after the government started to lift restrictions.
Investors need to appreciate that while there has been demand destruction in the short term, it hasn't been structurally removed, as infrastructure assets remain key to a functioning economy.
Key role in a portfolio
In our view, infrastructure assets should still be a key consideration for portfolios. It is not just the diversification benefits these assets bring; it is also the stable earnings growth. The current market volatility and share price corrections, especially in toll road and airport assets, afford investors an attractive entry point.
Our preference is for infrastructure assets that provide CPI-plus style growth, which allows the company to pay a stable and growing distribution to shareholders. This also limits the impact of movements in interest rates on the asset price, especially in a rising interest rate environment.
Three funds to watch
1. Pinnacle BNY Mellon Global Infrastructure Yield Fund
The BNY Mellon global infrastructure strategy seeks to deliver a 6% gross yield by investing in infrastructure and real-asset businesses with stable income characteristics and the potential for capital growth. The fund can invest in a wider set of assets, which include what some may consider "non-traditional" infrastructure (for example, broadband, hospitals, aged care). This increases the opportunity set from 75 to 500 names.
2. UBS Clarion Global Infrastructure Securities Fund
Sub-advised by CBRE Clarion, this fund draws upon CBRE's global infrastructure platform to gain insights into market trends, investment risk and valuations. It derives its information edge via its direct and listed infrastructure platform and proprietary VISTA valuation models to compare equities globally. This gives it an edge over others, and the investment team has strong credentials and experience.
3. RARE Infrastructure Value Fund
The RARE fund (unhedged) offers a diversified portfolio of globally listed companies. Prospective investors can expect target yield outcomes of 3%-5%, stemming from stable, inflation-linked returns and low risk over an investment cycle. The value strategy has a tilt towards mature infrastructure assets, such as regulated utilities and transport, and developed markets.
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