Download Why listed infrastructure is at the core

ROUNDTABLE
SPECIAL
FEATURE
INTERVIEW
Why listed infrastructure is at the core
Can listed infrastructure be complementary or act as a proxy to direct and fund investments in a portfolio?
Jeremy Anagnos, CBRE Clarion chief investment officer – infrastructure, takes us through the possibilities
Q
In a listed
environment,
you are able to
reposition your
portfolio exposure
to either capitalise
or to move away
from changing risk
dynamics”
50
INFRASTRUCTURE INVESTOR
In our last conversation, you
mentioned that there is a
learning process involved in
utilising listed infrastructure to fill
the core bucket. What does that
learning process entail?
JA: Investing in listed infrastructure is
a good way to gain exposure to the asset
class and its unique investment characteristics. I think there will always be a need
for a process to explain to investors that
holding a basket of listed infrastructure
securities for a long-term period, as an
investor would in a fund or direct investment, provides that investor with a core
infrastructure return.
Investors will find that the underlying
investments in this listed space fall into
the core infrastructure basket – the types
of assets (airports, toll roads, pipelines,
water utilities, electric transmission, wind
and solar power contracted generation)
that investors are paying for in the market
today. Moreover, they will find that the
performance of the listed companies is
driven by those assets and thus, you have
a proxy for core infrastructure investing,
with certain benefits and risk differences
from direct or fund investing.
Q
What are some of the
benefits of investing in listed
infrastructure?
JA: Exposure to listed infrastructure provides investors with the investment benefits
of the underlying assets with better liquidity, transparency, diversity and less leverage
than investing in unlisted funds. The listed
market is very broad and diverse. We’re
talking about existing core infrastructure
assets that you’re able to access in a way
that is immediate, scalable from very small
amounts to very large amounts, and provides access to the same exposure. You
are not having to go and find new investments for each additional dollar, you’re
just bringing it across the same pool of
securities and buying more shares.
It’s a highly-liquid investable market
of infrastructure securities with nearly $3
trillion in market cap, and the companies
operate with fairly low to moderate leverage. The leverage ratios on the public
market tend to be about 35 to 40 percent
loan-to-value. By comparison on the private side – certainly in fund vehicles –
they are generally using higher levels of
leverage, up to 55 and 60 percent, so you
have a higher level of risk in the underlying vehicle structure as opposed to in the
listed market.
Q
What would you say to
investors who believe they
already have their fill of listed
infrastructure through their global
equity bucket?
JA: An investment via a global equity allocation is not an optimal way to gain exposure to the asset class. When investors are
thinking about making an allocation to
an asset class, they are seeking to get a
certain exposure to a risk-return profile.
If you think of some of the overlap of
global listed infrastructure stocks to, let’s
say, the MSCI World Equity Index, you’re
talking about less than a 5 percent overlap. In many cases, your exposure could
ANNUAL REVIEW | MARCH 2016
SPECIAL FEATURE
be far less than that and certainly not in
a directed way, considering a company’s
valuation and risk profile consistent with
the way a dedicated infrastructure investor would analyse it.
Q
Are listed infrastructure
investments more risky than
direct investments?
JA: If one measure of risk is standard deviation of the returns, then on that metric,
listed infrastructure is going to ultimately
look riskier because of liquidity, pricing and
immediate availability of valuation data. So
that standard deviation will appear higher
for listed infrastructure than direct.
But there are other ways to think about
that risk because there’s a risk to being
locked into an investment for a long
holding period in a direct investment or
a fund vehicle, when regulation, political
agendas, technology, interest rates and
other factors can change and impact the
risk and return profile of your investment.
In a listed environment, you are able
to reposition your portfolio exposure to
either capitalise or to move away from
changing risk dynamics.
Q
Considering listed
infrastructure investments
allow trading ‘all day long in real
time’, does that mean investors
should view them any differently
than their direct and fund
investments, from a strategic point
of view?
JA: I believe listed infrastructure can be
viewed as complementary to unlisted in
terms of allowing an investor to either
increase or decrease their allocation
over time.
It allows a more dynamic allocation process and when investors think about their
holding period for infrastructure, they
should be looking at the overall return
over that period and their exposure in the
listed markets similar to what they’re looking at in the direct markets. Such that if
you remove the daily valuations and you go
52
INFRASTRUCTURE INVESTOR
It’s a highly-liquid
investable market
of infrastructure
securities with
nearly $3 trillion in
market cap, and the
companies operate
with fairly low to
moderate leverage”
to annual valuations for the listed market,
you would have a much lower realised volatility, similar to the direct market, with a
more comparable risk-return profile.
Q
What are some of the key
themes in the contemporary
listed infrastructure market?
JA: The overall environment is one of
low growth, low inflation and low commodity prices. Investors are seeking the
infrastructure asset class for predictable
returns and listed infrastructure is very
well positioned for this.
The companies own a very large base
of existing infrastructure assets that
are ageing and require updating and
replacement. This ageing infrastructure
has unfortunately been in the headlines
in the US more recently, with the contaminated water in Michigan and a gas
storage leak in California, which highlight that we’ve got very old infrastructure needing replacement.
The investment that will be required
is substantial and recurring. Listed companies will undertake this investment,
earn a regulated return on the investment in excess of their cost of capital
leading to consistent and predictable
earnings growth.
Related to that, there’s a very significant change going on in the energy
landscape. At the Paris summit last year,
196 nations signed an agreement to limit
noxious emissions to try to limit global
warming. The global trend is to reduce
the amount of carbon that we have going
into the atmosphere. You’re going to have
a tremendous amount of investment globally to bring on natural gas-fired generation, which is far less polluting than coal,
and renewable investments, such as wind
and solar power generation. Listed infrastructure companies are at the leading
edge of this investment theme and will
benefit from the consistent earnings
growth generated by the attractive returns
on these investments.
Q
What is CBRE Clarion’s nearterm outlook on the listed
infrastructure market?
JA: For 2016, we’re expecting listed
infrastructure, which produces about a
4 percent dividend yield, to grow that dividend to 7 or 8 percent and offer attractive double-digit returns. These will be
supported by the consistent and stable
investments that companies are undertaking for ageing infrastructure and new
energy infrastructure investment. Those
themes carry on into 2017 and 2018.
And finally, given the amount of
capital that is trying to gain exposure
to infrastructure, increasing allocations
and the overall scarcity of good quality
core infrastructure assets, I think that
investors are going to increasingly look
to the listed infrastructure market to
help them meet that allocation. So we
see more capital coming into the listed
infrastructure market. n
SPONSORED BY
CBRE CLARION
ANNUAL REVIEW | MARCH 2016