Lonsec: Infrastructure outperforms long term forecasts

Investment in listed infrastructure funds has continued to grow over the past year, buoyed by strong long term performance, increasing investor awareness and a preference for defensive equities in the face of conflicting macro themes, according to a report by investment research house Lonsec Research (Lonsec).

Lonsec’s Infrastructure Securities Sector Review rated 15 funds and found a majority of fund managers exceeded the 8.5% per annum long-term return forecasts of Lonsec-rated fund managers. Over a five year period to March 2014, the sector has averaged a return of 18.2% per annum, although the report warns it is unlikely for this type of performance to be repeated.

The report observed that while global infrastructure stocks generally lagged broader equities in 2013, the sector has performed strongly in early 2014 as investors shifted to less risky securities in the face of mixed US economic data and expectations that interest rates would remain lower for longer.

Expectations of rising US interest rates over the past year have filtered through to interest rate sensitive assets such as infrastructure stocks, leading to comparatively higher volatility than previous years.

Lonsec’s Senior Investment Analyst Andrew Coutts said while interest rate risk affects the infrastructure sector because many assets are backed by relatively high levels of debt finance, managers can actively adjust their allocation to specific assets to manage exposures.

“Infrastructure assets tend to be unique, with each offering a different risk-return profile in sectors varying from airports and roads to utilities and communications, so by investing in companies across subsectors, investors can diversify this risk,” Mr Coutts said.

This is a case in support of active management, with Lonsec suggesting investments in assets with strong market positions, sustainable growth opportunities, inflation protected income and relatively low or hedged debt levels to minimise risk.”

Other key highlights Mr Coutts noted from the report:

– Europe was the top global listed infrastructure performer by region, as the area was bolstered by receding fiscal austerity and sovereign bond yields falling to multi-year lows

– Majority of emerging market equities underperformed developed world equities amidst concerns of China’s economy slowly and further quantitative easing by the US Federal Reserve

– Growth is expected to be underpinned by resilient demand for services and long term structural drivers including urbanisation, globalisation of trade, mobilisation of data and securitisation of energy supplies

Lonsec notes infrastructure is a strong asset class to help investors achieve portfolio diversification, offering reasonable levels of long term expected growth with higher yields than equity. It also has the benefit of being underpinned by physical assets which can offer protection against inflation.

“Infrastructure is appealing as it is expected to deliver an attractive yield and provide a relatively strong return at lower risk than equities and global property. However, considering the correlation with broader equities of the sector, Lonsec considers infrastructure a growth asset and recommends inclusion within the balanced and growth options within a strategic asset allocation framework,” Mr Coutts concluded.