The investment case for infrastructure as a defensive asset class remains as sound as ever, but financial planners need to pay close attention to how assets in the sector are defined and classified before committing client funds, according to analysis by fund manager Maple-Brown Abbott (MBA).
Not all infrastructure companies are created equal, and nor are all indexes that purport to track the infrastructure sector, MBA’s analysis shows. Some indexes have as little as 73 per cent exposure to underlying infrastructure assets; and even the “purest” has only 83 per cent. But the difference can be critical.
The head of global listed infrastructure for MBA, Andrew Maple-Brown, says failing to correctly identify assets that have true infrastructure characteristics can lead to disappointing investment results and in the asset class failing to deliver on its aim of protecting investors’ capital during market downturns.
Perceived shortcomings in the traditional infrastructure market indexes led Maple-Brown Abbot to join a push to create a new index that more accurately tracked the sector and which more accurately reflected the expected defensive characteristics of the asset class.
New index
It led to the development of the FTSE Global Core Infrastructure 50/50 Index, which Maple-Brown Abbott’s infrastructure funds now use as their benchmarks.
“A question we often receive from investors is whether all infrastructure assets are defensive, and whether indeed they are equally defensive,” Maple-Brown says.
“An extension of that is indeed whether all infrastructure strategies are defensive, or whether it matters which infrastructure strategies you invest in.
“That’s obviously a very important question for investors. Investors look at the asset class in general as a defensive allocation within a portfolio; in terms of fulfilling on that promise it’s critical that they analyse to what extent the assets are truly defensive.”
Maple-Brown says no two companies have identical characteristics and no two infrastructure companies have identical characteristics, and therefore are never equally defensive. For example, a pipeline offers “true” infrastructure characteristics, whereas a port generally does not.
“The biggest predictor in terms of their defensiveness is probably the sector in which they sit,” Maple-Brown says.
“There are some more defensive sectors, particularly regulated utilities for example, that are extremely defensive infrastructure assets, while there are other sectors within the asset class that we look at which are still defensive, but less defensive.”
Four chief characteristics
Maple-Brown Abbott says the manager defines true infrastructure assets as having four chief characteristics:
- They are involved in essential services and are assets used by a large number of people on a regular basis
- They enjoy strong strategic (monopolistic or duopolistic) market positions
- They enjoy defined and predictable cash flows
- They deliver predictable growth and offer inflation protection to investors.
The infrastructure index that contained the highest proportion of companies that enjoyed these characteristics has also demonstrated the strongest defensive characteristics during recent market downturns.
“We think there’s a pretty a clear message there in terms of the importance of the definition and the importance of having a “pure” portfolio in terms of delivering on the defensive promise of infrastructure assets,” Maple-Brown says.
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Not just the index
But just selecting the better index is not all an infrastructure manager needs to do to maximise the defensive characteristics of its portfolio. Steven Kempler, a portfolio manager with Maple-Brown Abbott, says the manager has a focus list of about 110 companies drawn from the approximately 220 constituents of the FTSE Global Core Infrastructure 50/50 Index, which is reckoned to be the purest of all global infrastructure indexes with 89 per cent exposure to underlying infrastructure assets.
Kempler says that even so, as many as 40 of the index constituents don’t meet the definition of infrastructure; a number are eliminated though qualitative screening of cash-flow volatility and because they have poor inflation-protection characteristics; and some are struck out because they are too small or too illiquid.
Meanwhile, AMP Capital has responded to growing demand from trustees of self-managed super funds (SMSFs) for infrastructure investment options and has added its Core Infrastructure Fund to its SMSF suite. The fund requires a minimum investment of just $10,000 and offers exposure to a 50-50 mix of direct infrastructure assets and listed infrastructure companies.
In a statement, the portfolio manager of the AMP Capital Core Infrastructure Fund, John Julian, said the fund aims to deliver sustainable income and capital growth over the long term by identifying investment targets that can “deliver predictable cash flows through economic cycles, and this has resulted in consistent returns in good times and bad”.
