16 minute read
Given high inflation and volatile markets, investors seeking to reduce risk while maintaining attractive total return potential are increasingly allocating to listed infrastructure, which has substantially outperformed the broad equity market year-to-date thanks to its unique characteristics.
- Listed infrastructure has historically offered equity-like returns, but with lower volatility and more attractive downside capture relative to global equities.
- Infrastructure has shown positive inflation sensitivity and appears attractively priced relative to private market valuations.
- A skilled active manager offers the potential to enhance returns by seeking to take advantage of the significant performance dispersion across subsectors, geographies and securities.
What is infrastructure?
Infrastructure assets form the backbone networks that support essential services, which enable communities to function and economies to grow. The $4.5 trillion global listed infrastructure universe consists primarily of companies that own and operate these assets, grouped into four main categories:
These businesses have common characteristics that unite them as an asset class:
- Long-lived assets: Infrastructure assets typically have useful lives of several decades, providing a long-term source of income.
- High barriers to entry: Strict zoning restrictions, large capital requirements and, in some cases, exclusivity agreements (monopoly status) make it difficult or prohibitive for competitors to enter the market.
- Inelastic demand: Infrastructure provides essential services that often remain in demand even during economic downturns.
- Relatively predictable cash flows: Infrastructure assets are often regulated or operate under long-term contracts or concession agreements, typically resulting in greater cash flow stability than in many other businesses.
Why invest in infrastructure?
Historically, listed infrastructure has generated competitive performance relative to global equities while providing access to subsectors and investment themes that are typically under-represented in broad equity market allocations (Exhibit 1).
Notably, infrastructure has been a defensive and often counter-cyclical asset class, generally outperforming the broader equity market during business cycle and equity market downturns. The distinguishing historical characteristics of listed infrastructure have contributed to a significant rise in allocations to the asset class in recent years.
Historically competitive returns with lower volatility
10-year rolling return and risk statistics, listed infrastructure vs. global equities
At April 30, 2022. Source: Cohen & Steers.
Past performance is no guarantee of future results. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast set forth in this presentation will be realized. The information above does not reflect information about any fund or account managed or serviced by Cohen & Steers, and there is no guarantee investors will experience the type of performance reflected above. Diversification cannot ensure a profit or protect against loss in a declining market. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Upside/downside capture ratios show whether a given asset class has outperformed—gained more or lost less than—a broad market benchmark during periods of market strength and weakness, and if so, by how much. See end notes for index associations, definitions and additional disclosures.
Why own infrastructure now?
Performance amid moderating economic growth and high inflation
The combination of slowing economic growth, tightening financial conditions and elevated global equity valuations suggests that a cautious stance toward traditional risk assets is warranted at this time. In contrast, this type of environment can be attractive for listed infrastructure. Indeed, infrastructure has significantly outperformed the broader market in the first four months of 2022.(1)
The essential nature of infrastructure services, coupled with revenue models that frequently have inflation-sensitive pricing mechanisms, has historically been a catalyst for strong absolute and relative returns for infrastructure in stagflationary periods—times when growth surprises to the downside and inflation to the upside (Exhibit 2).
In addition to their relatively stable and inflation-defensive earnings, infrastructure companies tend to have low-cost and long-duration debt. The majority of the listed infrastructure universe has taken advantage of accommodative credit markets in recent years to lock in low borrowing costs, which may help reduce the negative impact of rising interest rates in the near-to-medium term. Furthermore, many infrastructure companies can pass higher interest costs along to customers through regulatory mechanisms.
Superior returns in challenging conditions
Real returns when growth unexpectedly slows and inflation rises (%) July 1991–March 2022
At March 31, 2022. Source: Bloomberg and Cohen & Steers.
Past performance is no guarantee of future results. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Returns represent annualized average returns when U.S. gross domestic product is below its prior-year estimate and the U.S. Consumer Price Index above its prior-year estimate, based on the Philadelphia Federal Reserve Survey of Professional Forecasters 4-quarter-ahead real GDP forecast and the University of Michigan survey of 1-year-ahead inflation expectations, respectively. See end notes for index associations, definitions and additional disclosures.
(1) Year-to-date performance through April 30, 2022: FTSE Global Core Infrastructure Net Tax Index –0.1% vs. MSCI World Index (net) –13.0%.
Rising rates may present buying opportunities
While infrastructure stocks may at first react negatively to rapid increases in interest rates, performance has historically improved over the long run as the initial shock of higher rates wore off and investors began to focus on underlying fundamentals—including some degree of positive economic sensitivity and inflation pass-through mechanisms. Exhibit 3 shows average returns during the 13 largest spikes in the 10-year U.S. Treasury yield since 2000. After an initial reaction, infrastructure stocks subsequently produced strong absolute and relative performance.
Resilience in the face of interest rate increases
Cumulative returns in rising-rate environments
At April 30, 2022. Source: Bloomberg, Morningstar, Cohen & Steers proprietary analysis.
Past performance is no guarantee of future results. The information presented above does not represent the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance listed above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. (a) Rising-rate periods shown are the largest 1-month increases in the yield of the U.S. 10-Year Treasury since 2000 and through March 30, 2018. (b) Most recent meaningful rate increases (greater than 0.50%) have occurred in longer than 30 days. (c) Average is calculated as the simple average of infrastructure returns relative to equities over the periods shown. See end notes for index associations, definitions and additional disclosures. (d) Returns during subsequent periods are calculated as an average cumulative return from the ending dates of the rising-rate periods, over the subsequent 3, 6 and 12 months.
Valuation support from significant private investment
As demand for private investment opportunities in infrastructure continues to rise, many private infrastructure fund managers have had difficulty deploying their capital. As a result, there is over $336 billion in assets currently on the sidelines, looking for suitable infrastructure investments (Exhibit 4).
With only a finite number of active investment opportunities available at any given time, competition for assets is high, ultimately driving asset prices up. In recent years, private funds have acquired listed infrastructure assets at a 29% average premium over prices before acquisition.(1) We believe private infrastructure transactions that command premiums well above implied cash flow multiples for listed infrastructure companies provide a rising floor of support for listed valuations.
Record dry powder creating a valuation floor
Private infrastructure dry powder ($ billions)
At April 30, 2022. Source: Preqin, Cohen & Steers.
There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast set forth in this presentation will be realized. As defined by Preqin, dry powder is the amount of capital that has been committed to a private equity fund minus the amount that has been called by the general partner for investment. See end notes for additional disclosures.
(1) Average calculated by Preqin from all reported transactions over the 3-year period ended March 31, 2022.
The case for active management
Historically, listed infrastructure returns have varied widely among different geographies and subsectors (Exhibit 5). Macro factors, such as interest rates and economic growth, can affect infrastructure companies in different ways, depending on the companies’ business models, contract structures, financing needs and other factors. Likewise, regulatory and political environments can be key drivers of return dispersion at the security level. These differences underscore the importance of fundamental analysis, which is at the core of active management.
Active managers can adjust a portfolio’s allocation based on their view of the risks and opportunities offered by various securities, geographies and market segments, potentially leading to favorable results if the manager’s outlook is realized.
Wide range of returns highlights opportunity
Calendar-year range of sector returns
At April 30, 2022. Source: Morningstar
Past performance is no guarantee of future results. Numbers may not sum due to rounding. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. See end notes for index associations, definitions and additional disclosures.
The Cohen & Steers advantage
Experienced global investment team
• One of the largest investment team dedicated to listed infrastructure investing
• Local expertise with experienced analysts and traders located in key markets globally
Substantial market position
• Size and scale provide access to company management, regulators and other market participants
• Among the largest dedicated listed infrastructure investors, managing $9.2 billion in assets
Rigorous investment process
• Top-down, macro-level sector and country analysis combined with bottom-up, company-level research
• Strict focus on owners and operators of infrastructure assets
• The asset class is evolving amid investor demand and massive investment opportunities
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Index definitions and important disclosures
An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may differ from a particular investment.
Global listed infrastructure: UBS Global 50/50 Infrastructure & Utilities Index for periods through March 31, 2015; FTSE Global Core Infrastructure 50/50 Net Tax Index thereafter. The UBS Global 50/50 Infrastructure & Utilities Index tracks a 50% exposure to the global developed-market utilities sector and a 50% exposure to the global developed-market infrastructure sector. The index is free-float market-capitalization weighted, is reconstituted annually with quarterly rebalances, and is net of dividend withholding taxes. The FTSE Global Core Infrastructure 50/50 Net Tax Index is a market-capitalization-weighted index of worldwide infrastructure and infrastructure-related securities and is net of dividend withholding taxes. Constituent weights are adjusted semi-annually according to three broad industry sectors: 50% utilities, 30% transportation, and a 20% mix of other sectors, including pipelines, satellites, and telecommunication towers. Exhibit 2: 50/30/20 blend of Datastream World Gas, Water & Multi-Utilities, Datastream World Pipelines and Datastream World Railroads through 7/31/08; Dow Jones Brookfield Global Infrastructure Index thereafter. The Datastream World Index Series encompasses global indexes of companies in their respective sectors (Gas, Water & Multi-Utilities; Pipelines; and Railroads) and is compiled by Refinitiv Datastream. The Dow Jones Brookfield Global Infrastructure Index is a float-adjusted market-capitalization- weighted index that measures performance of globally domiciled companies that derive more than 70% of their cash flows from infrastructure lines of business.
Global equities: MSCI World Index, a free-float-adjusted index that measures the performance of large- and mid-capitalization companies representing developed market countries and is net of dividend withholding taxes.
U.S. Treasuries: ICE BofA U.S. 7-10 Year Treasury Index, composed of U.S. Treasury Notes with a 7-to-10-year maturity.
Data quoted represents past performance, which is no guarantee of future results. The views and opinions presented in this document are as of the date of publication and are subject to change. There is no guarantee that any market forecast set forth in this document will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Cohen & Steers does not provide investment, tax or legal advice. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing. No representation or warranty is made as to the efficacy of any strategy or fund or the actual returns that may be achieved. The views and opinions expressed are not necessarily those of any broker/dealer or its affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules or guidelines.
Risks of investing in listed infrastructure. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, operational or other mishaps, tariffs and changes in tax laws, regulatory policies and accounting standards. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties and differences in accounting standards. Some international securities may represent small and medium-sized companies, which may be more susceptible to price volatility and may be less liquid than larger companies.
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