Legg Mason subsidiary RARE Infrastructure’s co-CEO and CIO Nick Langley looks at some of the drivers set to power global infrastructure – and the income it can provide to investors – over the long term
- Market set to double in size
The value of infrastructure globally is set to more than double over the next 15-20 years as governments – which own the vast majority of infrastructure assets around the world – use private capital to expand or upgrade existing transport and energy networks, Langley said.
“Infrastructure is now worth $50trn but this should rise to $110trn over the next 15-20 years. Just to maintain the existing stocks of infrastructure around the world costs $2trn-$3trn a year, but governments cannot afford such levels of investment, let alone the further cost of expanding and enhancing their infrastructure,” Langley said.
“It means more assets will be made available to private investors, and with more options to choose from, it should help investors generate attractive returns.
2. Uncorrelated returns
Infrastructure has a very different risk/return profile to other assets, Langley said, providing a true alternative for portfolios, especially as allocations to infrastructure remain well below other assets such as equities and bonds.
“Global infrastructure names march to a different beat compared to other equities. If you were to compare listed infrastructure to global equities, for example, you achieve a reasonable level of participation on the upside, but far more protection on the downside, underpinned by secure dividends,” Langley said.
While infrastructure and alternatives remain less well represented in portfolios, investors have started to diversify in the past few years. According to statistics from the Investment Association, the allocation to alternative assets increased from 11% to 13%* in 2014/15, consistent with the trend for investors seeking complementary sources of return and income.
3. Growth of renewable energy
The world is changing, with new sources of clean energy taking more market share and the older, dirtier industries in retreat.
Infrastructure allows investors to benefit from that directly, with some $6trn of investment to be made into renewables over the next 20 years, according to current forecasts.
“There will be huge investment into renewables following the agreement by governments around the globe to cut their emissions, and we even think current forecasts for $6trn of spending are too low given the need to meet the new policy goals,” Langley said.
“That kind of tailwind will provide huge opportunities for investors.”
4. Attractive yield in a low-growth, low interest rate world
With interest rates at rock-bottom in the UK and other developed markets, and yields on government bonds plunging, investors have been left with a stark choice; take more risk to generate income, or accept a lower yield.
Low inflation and the recent Brexit vote have pushed the yield on ten-year gilts to a record low of just 1.09%**, while cash pays 1.34%*** on average currently.
Other more risky assets, such as high yield or emerging market bonds, pay more income, but do not guarantee the return of initial investments. Langley said investors could therefore embrace alternative sources of income, rather than having to move further up the risk-spectrum or forego returns.
“Many mature infrastructure assets have attractive and stable yields, and our recently launched Legg Mason IF RARE Global Infrastructure Income fund is targeting a yield of circa 5% per annum,” he said.
“We believe such a level of income, with the added potential for capital growth, is attractive when compared to many traditional sources of yield.
5. Stable income
There are many different type of infrastructure around the globe, offering different risk/reward profiles. RARE’s approach is to invest in stable, growing and forecastable cash flow businesses, rather than those with erratic and commodity sensitive business models – for example investing in transmission and distribution orientated infrastructure businesses, rather than the energy generation infrastructure businesses (independent power companies) that rely heavily on demand and supply dynamics of the open market.
“We focus on long duration assets which have long-term cash flow visibility, and therefore predictable cashflows and low volatility,” Langley said.
“They also typically have inflation protection built in, and have limited competition because of the high barriers to entry to various industries in the infrastructure universe. All of this combines to provide a stable income protected from some of the shocks you can experience in other asset classes.”
* According to the Investment Association’s Asset Management Survey 2014-15.
** According to Thomson Reuters data, via the FT, showing UK ten-year gilts at 1.09% as at 16:31 on 24/06/16
***According to Moneyfacts, the average cash ISA rate was 1.34% as of March 2016
NB: All references to $ are USD.