Benefits of global listed infrastructure securities

April 09, 2018 10:16
From a sector perspective, utilities is the largest component of major global listed infrastructure securities benchmarks, with pipelines & storage at a distant second. Photo: Reuters

In recent years, global listed infrastructure securities (GLIS) have emerged as an alternative for investors looking for steady income flows from real assets besides real estate, REITs and high dividend yield stocks. Trends such as urbanization and expansion of mega-cities (especially in emerging markets), China’s 'One-Belt, One-Road' development strategy, the rise of economic nationalism and technological changes provide opportunities for the growth of the infrastructure universe. Moreover, continuation of investments in infrastructure sectors due to replacement of aged infrastructure assets also supports the growth of the sector.

Generally speaking, infrastructure investments are defined as those with underlying economic infrastructure assets that enjoy monopolistic market positions and generate steady cash flows for investors. However, infrastructure assets are diverse in terms of operations and regulatory regimes, and are increasingly under the influence of technology and politico-economic changes. Reversal of globalization may affect established trade flows and supply chains, which in turn affects transportation infrastructure such as ports, airports and railways.

Technological changes that may cause business model disruption include the increasing use of autonomous vehicles and 3D printing, which may change society’s travel patterns and organization of transportation networks; emphasis on "environmental-friendly" energy uses, especially the deployment of renewable energy and battery storage, which affect old business models of coal-fired and oil-fired power producers, and will consequently influence the demand and economics of pipeline infrastructure. Thus, as the sector is expected to continue to be supported by economic expansion, the landscape is also likely to evolve continuously. Therefore, a thoughtful strategy and a thorough research are necessary to sustainably profit from this sector.

Amongst the three GLIS benchmarks available on Bloomberg, the GPR Pure Infrastructure USD Index (PUREGLUS), the S&P Global Infrastructure Index (SPGTIND) and the FTSE Developed Core Infrastructure Index USD (FDCIIU), all have different criteria in terms of market capitalization and liquidity. The sector breakdown and country weights of the constituents of each index also vary.

In the country-sector matrix of the GLIS universe as a whole, the US and Canada have dominated the largest segments across the board, followed by Japan’s transportation and utilities sectors, and utilities sectors in the UK, Spain and Hong Kong.

From a sector perspective, utilities is the largest component, with pipelines & storage at a distant second. This shows that the few key sectors have not only dominated the GLIS universe, but also limited the choices available to investors. For investors who are particularly interested in the Asia-Pacific market, they may need to investigate further on the sector drivers.

Comparing the GLIS’ performance to those of Asia-Pacific REITs, both asset types perform quite similarly most of the time, with exception of last year in which GLIS outperformed Asia-Pacific REITs. On a risk-adjusted basis described in terms of Sharpe ratio, GLIS have been better than equities and in-line with REITs in general.

Although GLIS underperformed equities recently due to equity market rallies over the past few years, over a time span of 10 years or longer, GLIS have consistently outperformed other asset types such as bonds and equities. In a multi-asset portfolio, a good addition of GLIS provides the benefits of diversification as it enhances the risk-adjusted returns of such portfolio and mitigates the risks of an equities-heavy portfolio. Moreover, addition of GLIS to AP REITs also improves the risk-return profile of the mixed portfolio and leads to a more optimal portfolio.

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Chief Investment Officer, Admiral Investment Ltd.