Discussion paper - A global approach to infrastructure investment

Transcription

1 Australian investors are familiar with infrastructure as an asset class. The domestic sector is relatively mature and well understood after many years of government privatisations in this country. Despite this, there are only 15 infrastructure stocks listed on the ASX, most of which operate utilities, toll roads or airports. The global listed infrastructure sector has a much broader scope, there is exposure to developed and developing markets, and there are additional subsectors not represented on the ASX, such as wireless communication towers and water utilities. The universe of listed stocks is large and liquid, with nearly 350 companies representing over a dozen subsectors and spanning a multitude of geographies. The long-term prospects for global listed infrastructure are underpinned by the need for infrastructure development all over the world. There continues to be a need to replace existing ageing infrastructure in developed markets, and increasing requirements for investment to accommodate powerful demographic trends in developing markets such as population growth and urbanization. Many governments have under-invested in infrastructure in the past, but fiscal budget constraints and ongoing stresses in the wake of the global financial crisis are restricting their ability to meet the infrastructure challenges ahead. Governments are therefore incentivising the private sector to help fund, develop and operate infrastructure. For investors, the global listed infrastructure sector offers exposure to these potential tailwinds with diversification and the defensive qualities of the asset class. Figure 1: The global infrastructure universe Infrastructure assets provide essential public services that facilitate economic growth Transportation Airports, Toll Roads, Marine Ports, Railways We focus on owners and operators of infrastructure assets Cohen & Steers Universe Energy Midstream 350 companies in 16 countries; focus list of200 Includes both developed and emergingmarkets Global market capitalization: $2.4 trillion (1) Utilities Electric,Water, Gas Utilities We screen for companies that exhibit key infrastructure characteristics Relatively predictable, often inflation-linked cash flows Largely regulated and monopolistic businesses High barriers to entry Communications Towers, Satellites We generally avoid cyclical subsectors such as engineering and construction, and oil and gas production Argo Global Listed Infrastructure Limited Website invest@argoinfrastructure.com.au Telephone Postal Address GPO Box 2692 Adelaide SA 5001 Registered Address 19 Grenfell Street Adelaide SA 5000 ACN Share Registry Computershare Investor Services Website Telephone (in Australia) (outside Australia) Postal Address GPO Box 2975 Melbourne VIC 3001 Page 1

2 A global approach to investing in the asset class is critical, as investors can benefit from the diversification of being exposed to numerous regulatory, political, economic and currency regimes. Figure 2 below shows the wide disparity of returns between the best and worst performing segments (or subsectors) of global listed infrastructure each year, highlighting the active management opportunities for specialist fund managers. A significant benefit of investing in listed infrastructure stocks is that allocation changes can be made much more rapidly than would be the case with direct investment in infrastructure assets. Figure 2: Performance dispersion creates opportunity for managers (refer page 5 for disclaimer) Calendar-Year Range of Total Returns in AUD Key risks for global listed infrastructure Although portfolio diversification assists to reduce many of the more company or geography specific risks, there are two general areas of risk which are relevant to the listed infrastructure sector, being regulation and interest rates. We view regulatory risk as the most significant consideration for the sector, as infrastructure companies are often heavily regulated by governments due to the importance of their operations and assets to the community. Adverse regulatory change can have a substantial impact on infrastructure companies, although governments must bear in mind that if regulation becomes too restrictive, the private sector will not make sufficient returns to continue its investment. Since the global financial crisis of , the line between regulation and politics has become increasingly blurred. Regulators, who are tasked with maintaining high service quality at a reasonable cost, have remained somewhat predictable with regard to outcomes. However politicians, with very different agendas and time horizons, have looked more and more to confiscate economic returns from regulated or concession-based infrastructure businesses. Despite this, we believe that the period of peak political and regulatory risk, which occurred during the several years of austerity following the global financial crisis, may be behind us. Page 2

3 As capital intensive businesses, infrastructure companies tend to be sensitive to changes in global interest rates. That sensitivity does however vary across the infrastructure universe. While the asset class has typically reacted negatively to rapid increases in interest rates, performance has historically improved over the long run as the initial shock of higher rates wears off and investors begin to focus on fundamentals. Figure 3 below shows that after an initial downward reaction to yield spikes, infrastructure stocks subsequently produce strong performance. Figure 3: Infrastructure has Shown Resilience after Interest Rate Increases (refer page 5 for disclaimer) Infrastructure has often lagged global equities during periods where rates increase (1)...But has historically outperformed after the initial reaction (2) Rising rate period Rate increase (bps) 10 Year U.S. Treasury Infrastructure (4) vs. Global Equities (5) Relative Returns (%) 4/10/00 5/8/ % 16% Infrastructure (4) GlobalEquities (5) /7/01 12/7/ % 10/9/02 10/22/ % 6/13/03 7/15/ /24/04 4/23/ /15/08 10/14/ /30/08 1/29/ /14/09 6/10/ /11/10 12/10/ Cumulative Return 10% 8% 6% 4% 2% /27/13 6/25/13 ("Taper Tantrum") Average (3) % 3 months after rate increase 6 months after rate increase 12 months after rate increase Since Trump Election (11/8/16-12/31/16) Impact of the new US political regime on infrastructure investment The Republicans now have control of the White House and Congress, which increases the chance of an infrastructure push in the US, together with lower tax rates, tax reform and reduced regulation. An improved growth outlook associated with Trump s potential policies should benefit the more economically sensitive subsectors, such as freight railways. Also, midstream energy companies should benefit from easing restrictions on oil and gas production and reduced environmental empathy. However, policy uncertainties may result in higher volatility until there is more clarity about what President Trump will actually do. Globally, the political environment for infrastructure spending is positive. Fiscal stimulus packages specifically targeting infrastructure, combined with deteriorating service quality and stretched budgets, should drive a longer term focus on more efficient private sector financing, ownership and operation of infrastructure assets in the US and globally. Key offshore themes within the global listed infrastructure sector Towers - Compelling opportunities exist in the wireless communications tower subsector, particularly in Europe, which revolves around the increasingly data-intensive nature of wireless traffic, as well as expected demand growth for wireless devices. To accommodate the increasing data intensity of wireless traffic, telecommunications carriers are reportedly investing heavily in their networks, requiring more leased space from cellular tower companies to house their communications equipment. Page 3

4 Midstream Energy (including pipeline operators) - The outlook is that the global oil market is shifting into undersupply and that North America will gain market share as a global energy supply source. North American producers generally have lower up-front investment costs that give them a considerable advantage over most other production alternatives. Over time, midstream energy fundamentals should strengthen as commodity prices rise, volumes grow and the supply/demand balance for pipelines improves. Freight Railways - North American freight rail operators continue to benefit from expectations of strengthening economic conditions. US and Canadian freight rail volumes also appear to be improving, with cost cutting and efficiency gains a continued benefit for the subsector. Benefits of investing in global listed infrastructure via an ASX-listed investment company Closed-end structure A listed investment company (LIC) is a closed end corporate body. This structure is ideally suited to a long-term investment strategy, as unlike a managed fund, it does not experience redemptions which might otherwise force holdings to be sold at inopportune times. A LIC s shares trade on the ASX, so investors simply buy or sell shares on market to enter, exit or adjust their investment. As with any trade on the ASX, brokerage will apply to transactions, but LIC investors do not pay entry, exit or ongoing management fees. The LIC manages the portfolio and administers the company, absorbing all costs, tax and fees, so that the dividends paid to its shareholders do not carry any of the complex foreign income, tax deferred or currency components that generally flow through to investors in trust structures such as managed funds. A LIC pays Australian corporate tax and may generate franking credits which can be passed on to shareholders. Simple administration and diversification Investing in global markets is difficult, expensive and administratively burdensome for retail investors. Due to its corporate structure, a LIC can filter the complexities of overseas markets and foreign currencies into a single ASX-listed holding, which is not only easy for retail investors to manage but is also tradeable, which allows you to quickly and efficiently increase or decrease your exposure to a diversified portfolio of international investments. Most Australian investors hold the vast majority of their investments in Australian stocks, and the addition of shares in a global infrastructure LIC provides instant and flexible diversification. Corporate governance and transparency A LIC is a public company and is overseen by a Board of Directors which is elected by shareholders. In addition, because it is listed on the ASX, a LIC is subject to continuous disclosure requirements, providing transparency at all times. Further to this, the ASX requires all LICs to release their net tangible asset backing (NTA) per share at least monthly, to assist investors to track the underlying value of the portfolio. Page 4

5 Figure 2: Performance dispersion creates opportunity for managers At September 30, Data quoted represents past performance, which is no guarantee of future results. The information presented above (page 2) 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 (page 2). There is no guarantee that any historical trend illustrated above (page 2) will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The views and opinions are as of the date of publication and are subject to change without notice. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Source: FactSet. (1) 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. (2) The difference between the highest and lowest returning sectors was calculated by subtracting one from the other. Calendar year highest/lowest returning sector; 2012 Communications/Electric; 2013 Railways/Marine Ports; 2014 Diversified/Toll Roads; 2015 Diversified/Midstream; 2016 Midstream/Diversified. Figure 3: Infrastructure has Shown Resilience after Interest Rate Increases At December 31, Data quoted represents past performance, which is no guarantee of future results. The information presented above (page 3) 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 (page 3). An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. There is no guarantee that any historical trend illustrated above (page 3) will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The views and opinions are as of the date of publication and are subject to change without notice. Source: Bloomberg, Morningstar, CNS proprietary system. (1) Returns during rising rate periods are the 10 largest 1-month increases in the yield of the U.S. 10-Year Treasury since 2000 and through December 31, These rising-rate periods are 4/10/00-5/8/00; 11/7/01-12/7/01; 10/9/02-10/22/02; 6/13/03-7/15/03; 3/24/04-4/23/04; 9/15/08-10/14/08; 12/30/08-1/29/09; 5/14/09-6/10/09; 11/11/10-12/10/10 and 5/27/13-6/25/13. (2) Returns shown during subsequent periods are calculated as an average cumulative return from the ending dates of the 10 rising-rate periods shown above (page 3), over the subsequent three, six and 12 months. (3) Average is calculated as the simple average of relative returns of infrastructure relative to equities over the time periods shown. (4) Infrastructure represented by UBS Global 50/50 Infrastructure & Utilities Index for periods through March 31, The UBS Global 50/50 Infrastructure & Utilities Index tracks a 50% exposure to the global developed market utilities sector and a 50% exposure to global developed market infrastructure sector. The index is free-float market-capitalization weighted and reconstituted annually with quarterly rebalances and is net of dividend withholding taxes. For periods after March 31, 2015, the FTSE Global Core Infrastructure 50/50 Net Tax Index is used. (5) 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. Global Equities represented by the MSCI World Index. This report has been prepared by Argo Service Company Pty Ltd (ACN ; AFSL ), as general information only and is not intended to provide financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances before making any investment decisions. Page 5