Infrastructure: Susan Hely

With annual returns as high as 20%, no wonder investors believe boring is beautiful

Infrastructure investments are standout performers in a lowgrowth investment world. Who would have thought that investing in boring old railways, roads, ports and airports and power, water and telecom systems would do so well? But infrastructure funds returned 15% over calendar year 2016, according to the MSCI Australia Quarterly Unlisted Infrastructure Index. Over three years, infrastructure has returned 14.3%pa and over four years 14.4%pa.

A number of funds, such as Arrow Primary Infrastructure, have outperformed the median return, with a 20.8%pa gain over 2016, according to Morningstar. “Since 2008, infrastructure funds have done really well, coinciding with falling interest rates,” says Tim Wong, associate director at Morningstar.

Investors hunting for reliable income in a low-growth investment world have helped push up the demand for infrastructure. In particular, those companies with long-standing assets, often protected by high barriers to entry, generate reliable cash flow as well as some capital growth.

Infrastructure is expected to boom under President Donald Trump’s rebuilding plans while China, India and Latin America will modernise their decaying infrastructure to cope with the challenges of growing populations. McKinsey estimates the world needs to spend an average of $3.3 trillion a year to support rates of growth.

How to choose a fund

For Australian investors, there is a small but growing group of infrastructure investments. One option is direct listed Australian companies – such as the highway and railways group Transurban or gas utilities company APA Group – which can be bought and sold on the ASX. These essential services often have a near monopoly status.

There are also unlisted infrastructure funds that offer global investments because there are far more to choose from in the US and Europe. UBS is partnering with CBRE Clarion and distributing a global infrastructure fund called the UBS Clarion Global Infrastructure Securities Fund.

Last year two infrastructure funds listed on the ASX: the VanEck Vectors FTSE Global Infrastructure (Hedged) ETF (ASX: IFRA) and the Magellan Infrastructure Fund (Hedged) (MICH).

So what do investors need to look at when considering infrastructure?

“Know who is managing the strategy and look at the stability and experience of the team,” says Wong. Funds are run by specialists who have a deep understanding of the different sorts of infrastructure and the regulatory requirements governing the projects. For example, if the company runs electricity power lines, often the revenue is dictated by a regulatory body. In the US, regulatory regimes differ from state to state. “Prices may go up but what is important is understanding how the regulator will act,” says Wong.

Infrastructure investments provide diversification away from shares, even though they can behave in a similar fashion to the sharemarket, says Wong. When earnings from projects are indexed, they can be a hedge against inflation.

Global infrastructure funds should be used as a niche defensive asset class that makes up a small part of your portfolio. They can help in periods of risk diversion because they are less sensitive to business cycles but they are still equities and behave like other shares, says

Wong. He is wary of infrastructure funds with a high concentration of companies – usually between 20 and 25 – because they are exposed to stock-specific risks.

Wong recommends investors keep an eye on gearing, which is generally 40% to 60% debt to capital. If interest rates rise in a credit crunch, then this can hurt infrastructure investments and it is important that they continue to service the debt. “There are times when their gearing levels are an important consideration,” says Wong.

Other considerations include the oil price, which might affect pipeline infrastructure.

“Have reasonable expectations about how much your wealth will grow,” says Wong. “Infrastructure is meant to be a steady earner.”

Australians who have their super in industry funds are exposed to infrastructure through their diversified balanced option. Typically, they hold 3% to 4% in infrastructure, says Kirby Rappell, research manager at SuperRatings.

Industry Super Australia says funds’ investment in infrastructure, such as the Victorian Comprehensive Cancer Centre, the Royal Adelaide Hospital and Axiom Education in NSW, has delivered an average of 12%pa over 18 years. It says infrastructure has outperformed shares with only a third of the volatility.

Some super funds, such as HESTA and Cbus, offer stand-alone infrastructure investment options to members who want to construct their own asset allocation. HESTA calculates that $1000 in the infrastructure option would be worth $2150 after 10 years. Cbus is a big

investor in property – 13% of the balanced fund is in property, which it says creates 70,000 jobs for its members – as well as holding 24% in alternative investments such as infrastructure and private equity. It has proven to be a top strategy: Cbus was the third-best-performing balanced fund for calendar year 2016, earning 9.6%. Cbus’s infrastructure option did much better, returning 17.18% last year.

Infrastructure investment fees can be higher than typical share fund fees, ranging from 0.90% up to 2.30%. The two funds on the ASX offer infrastructure at a cheaper price. The VanEck ETF, which pays out income four times a year, charges an annual fee of 0.52%. But the Magellan fund, which is identical to the unlisted fund offered by Magellan, charges an annual management fee of 1.06% plus a performance fee of 10.10% of returns above certain hurdles.