Fund manager, Premier Miton Global Infrastructure Income Fund
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
A diverse asset class
The growth in infrastructure as an asset class has arguably been one of the success stories of the last 20 years, with infrastructure assets providing an attractive combination of resilience and growth, and a useful source of diversification when compared to traditional asset classes. The sector has positive attributes for all types of investor, but may be particularly suited to long-term institutional investors, given the nature of infrastructure assets and their return profile.
Infrastructure includes many large- scale, capital-intensive assets built out over many decades. Particularly in the utilities sector these assets are often monopolies, such as electricity transmission and distribution grids. Returns are usually determined by an independent regulator, with a mandate to support the reliability of the assets and incentivise growth capital.
These regulated returns can provide a stable, predictable cashflow and dividend flow to long-term investors, and are frequently linked to local inflation metrics. Investors in infrastructure can take advantage of these resilient, regulated returns from assets as diverse as renewable electricity generation, toll roads and fixed-line telecommunications networks.
Even where returns are not regulated, the nature of the assets in the sector can provide stable, visible, long-term contracted returns, as customers commit to use the assets over a long period of time. Sectors such as mobile telecommunications towers and natural gas pipelines provide investors with multi-year visibility of returns, and like regulated assets, these returns are often linked to measures reflecting local or regional inflation metrics.
Global Listed Infrastructure Organisation (GLIO) Index compared to Private Infrastructure and Global Equities – indexed to 100
Source: Global Listed Infrastructure Organisation (GLIO) data from 01.12.2002 to 01.01.2023. Past performance is not a reliable indicator of future returns.
An alternative way
Traditionally, institutions have accessed the infrastructure sector through direct investment in assets or through unlisted funds, which purchase a single asset or a collection of assets and where investors own stakes proportional to their investments in the funds. This has proved successful in terms of returns, which the above chart, showing aggregate data for ‘Private Infrastructure’ illustrates.
However, it does come with some disadvantages. Liquidity can be problematic, as it takes a significant period of time to make an investment and institutions are unlikely to be able to exit before the terminal date of the fund. Also, there is concentration risk if funds are invested in a single asset or small number of assets, limiting exposure to specific infrastructure sectors or geographies.
Listed infrastructure strategies offer an alternative way for investors, including institutions, to gain exposure to the sector. These strategies give exposure to the underlying infrastructure assets through equities investing in these sectors. As shown on the chart above, the listed infrastructure strategies have kept pace with private infrastructure funds over the past two decades and have significantly outperformed the wider equity market. They offer abundant liquidity and also a broad spread of assets across infrastructure sectors and geographies and provide a straightforward way for institutions to allocate to infrastructure.
One of the concerns commonly expressed around listed infrastructure strategies is that they are comprised of equities, and therefore correlate too closely to broader equity indices. It is useful to look at recent experience to see where the strategies can provide diversification when compared to conventional equity allocations.
2022 was a challenging year for equity markets, with broad indices delivering a negative return. In contrast, the Premier Miton Global Infrastructure Fund recorded a positive return, as did the broader Investment Association Infrastructure sector. The positive return demonstrates the relative defensive nature of the stocks in the listed infrastructure universe, in this case providing valuable diversification for investors. For example, the largest individual sector component of the Premier Miton Fund is utilities – a sector that makes up only 3% of the FTSE All-World Index.
A fertile feeding ground
The chart below illustrates another positive attribute of listed infrastructure, which is that the quoted companies can provide a fertile feeding ground for private investors looking for high quality assets at attractive price levels. The data illustrates that, over a sustained period, the multiples paid by private investors, including pension funds, private infrastructure funds, private equity funds and sovereign wealth funds, have been materially higher than the underlying aggregate multiple of earnings for the listed infrastructure benchmark. EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA).
The continued acquisition activity in the sector has provided a welcome boost to returns for listed infrastructure investors, and also highlights the significant underlying value in this area of the wider asset class.
Infrastructure EV/EBITDA – Individual Transactions v GLIO Index December 2007 to January 2023
Source: Global Listed Infrastructure Organisation (GLIO) data from 01.12.2007 to 01.01.2023 Past performance is not a reliable indicator of future returns.
The portfolio is currently constructed around the key long-term themes for global infrastructure, combining returns on existing assets with growth in areas essential to the functioning of society in the 21st century.
Firstly, we have a strong focus on the energy transition, and have investments in companies which we believe will benefit from the increase in renewable energy generation, the growing electrification of areas such as passenger cars and trucks and from developing technologies such as hydrogen as a fuel, carbon capture and storage and energy storage solutions.
We see the energy transition driving long-term positive returns from companies involved in wind and solar generation, from regulated utilities with electricity transmission and distribution grid assets, and from companies owning European electricity interconnectors.
We have a significant weighting in US regulated utilities and renewables, where we believe that the impact of the Inflation Reduction Act signed into law by President Biden in July 2022 will be a significant driver in broadening and accelerating the impact of the energy transition in the USA.
The second core theme in the fund is the provision of infrastructure to support the consistent growth in demand for high-speed data connectivity. Mobile telecommunications towers and masts and fixed-line fibre networks are the core assets supporting data networks, and in our view are consistently undervalued based on their long-term return potential as usage grows to meet customer needs. As well as owning the “pure-play” infrastructure stocks such as towers companies, we also own a number of network operators who themselves own significant fixed and mobile network assets.
Thirdly, we believe that natural gas is an essential transitional fuel, displacing coal, and augmenting renewables in electricity generation, and we have exposure to North American gas pipeline assets and liquified natural gas (LNG) export facilities.
The we believe that the characteristics of infrastructure, which can offer asset-backed, inflation-linked long-term returns, may be well-suited to institutional investors. Listed infrastructure funds give exposure to the asset class with liquidity and a breadth of exposure across infrastructure sectors and different geographies. Listed infrastructure funds may also offer a dividend income for investors, with the Premier Miton Global Infrastructure Income Fund currently yielding 3.72% as at 31.01.2023 (Source: Premier Miton).
The level of income paid by the fund may fluctuate and is not guaranteed. The historic yield reflects distributions declared over the past twelve months as a percentage of the fund price as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions.
As the objective of the fund is to treat the generation of income as either an equal or higher priority than capital growth, the fund’s charges will be taken from capital instead of income. This may result in higher levels of income payments but could result in capital erosion or constrain capital growth.