Infrastructure and utility stocks have been around a long time – the oldest listed utility, Consolidated Edison of the US, traces its listing to 1824. Yet it wasn’t until the 1990s that the asset class became a viable option for everyday investors.
More than 350 infrastructure and utility companies are listed on global stock markets, representing a market cap in excess of US$4 trillion; about three times the market value of the Australian stock market*. There are sound reasons why people should include these stocks in a diversified portfolio. They might be surprised just how much infrastructure and utility companies support their daily lives.
Infrastructure, by general definition, refers to large, fixed long-term assets that deliver essential services.
While utilities, highways and pipelines are commonly regarded as infrastructure, there is no agreement on whether or not data centres, car parks and other such assets form part of this universe. Irrespective of the murkiness of defining infrastructure, the case for the asset class can be made by looking at the attributes of infrastructure companies (where the term from now on covers infrastructure and utility companies).
WHY INVEST IN LISTED INFRASTRUCTURE?
Infrastructure is a distinctive asset class in three ways:
INFRASTRUCTURE CAN DELIVER SOLID AND STABLE EARNINGSThe vast majority of infrastructure assets typically face constant demand, limited competition and a stable regulatory environment. Infrastructure is thus well positioned to generate reliable cash flows and solid and stable earnings growth, no matter what economic conditions prevail.
INFRASTRUCTURE OFFERS INFLATION PROTECTIONInfrastructure comes with natural or built-in protection against inflation because regulators allow these companies to raise their prices to protect their earnings when their costs rise.
INFRASTRUCTURE HAS LOWER RISK OF CAPITAL LOSSAssets that have reliable earnings growth and stable income streams are typically havens – sources of stability – in times of market declines.
Including infrastructure in a diversified portfolio can enhance returns and reduce portfolio risk.
MAGELLAN’S INFRASTRUCTURE PHILOSOPHY
Our investment approach for infrastructure and utilities is founded on two principal objectives: to achieve attractive risk-adjusted returns over the medium to long term and to reduce the risk of permanent capital loss. As a result, we are an absolute-return focused manager that aims to invest in companies at prices that deliver attractive risk-adjusted returns over a three-to five-year period.
WHAT SETS OUR APPROACH APART?
Where our strategy is different is that we apply a stricter definition to what qualifies as infrastructure and a utility. We believe that a key reason why people invest in infrastructure and utilities is that they are seeking the reliable returns that are associated with the asset class. To achieve this objective, we limit our investment universe to stocks that provide investors with predictable, through-the-economic-cycle, inflation-linked returns. This means we exclude stocks whose earnings are sensitive to competition, sovereign risk and changes in commodity prices.
The stocks we consider for the strategy are mainly drawn from two sectors:
Regulated utilities, which includes energy and water utilities. We estimate that utilities comprise about 60% of the potential investment universe for the strategy. Utilities are typically regulated by a government-sponsored entity. Such regulation requires the utility to provide an essential service while efficiently allowing the utility to earn a fair rate of return on the capital it has invested.
Infrastructure, which includes airports, ports, railroads, toll roads, communications assets and energy infrastructure (oil and gas pipelines).
MAGELLAN’S INFRASTRUCTURE TEAM
Our infrastructure team consists of eight investment professionals headed by Gerald Stack. The team manages A$17 billion* for large and small investors based around the world. Key team members:
Gerald joined Magellan in 2007 and is Head of Investments and leads the team responsible for managing Magellan’s infrastructure portfolios. Gerald has more than 25 years of infrastructure investment experience.
Ofer joined Magellan’s Infrastructure Team in 2016 and was promoted to Portfolio Manager in 2017. Ofer has more than 20 years of infrastructure investment experience.
Ben joined Magellan’s Infrastructure Team in 2013 and was promoted to Portfolio Manager in 2017. Ben has more than 10 years of investment experience.
MAGELLAN INFRASTRUCTURE FUND
Our infrastructure strategy seeks to provide efficient access to the stable returns offered by the infrastructure asset class while protecting capital in adverse markets. The strategy typically holds between 20 and 40 infrastructure and utility stocks.
To learn more on how to access our Infrastructure funds, go to magellangroup.com.au/funds/forms-pds/
Magellan Infrastructure Fund
Magellan Infrastructure Fund (Unhedged)
Magellan Infrastructure Fund (Currency Hedged) (Managed Fund) (ASX:MICH)