Investors switch on to utilities
Infrastructure plays, such as electricity companies, are attracting more interest
They may look like boring, old-fashioned investments - but more and more savvy investors are switching onto infrastructure plays such as electricity utilities to protect against inflation.
Recently the sector received some high-profile backing after Li Ka-shing announced last month he would join with Deutsche Bank to list a new infrastructure fund on the Australian Stock Exchange. The US$1.8 billion fund will own stakes in Victoria's CitiPower and Powercor electricity networks, as well as South Australia's ETSA utilities, according to media reports.
That such a high-profile investor as Mr Li should take a shine to the sector underscores what many see as a good bet at a time when rising inflation is widely viewed as the biggest threat to the global economy. Owning stakes in bridges, railways, roads, airports and other essential service providers such as electricity utilities could be a smart play if consumers are facing the classic wage and price squeezes that accompany an inflation spiral. Faced with a choice, consumers are likely to slash expenditure in all but essential services.
As an added touch, boring old infrastructure plays also have stable income streams.
Some of the players appears to have already switched-on, with the market capitalisation of the listed infrastructure sector, including power, energy, water and transportation companies more than tripling to US$1.6 billion during the past five years. 'Governments around the world are decreasing spending on public works, such as railways, airports, hospitals and even schools, and encouraging the private sector to invest in them instead,' says Basil McIlhagga, Macquarie Securities' Global Head of Institutional Sales. 'As a result, private sector spending on what used to be government assets is growing, which is giving a tremendous boost to the infrastructure sector.'
The World Bank estimates Asian countries will need to spend US$1 trillion over the next three years to upgrade infrastructure.
Earlier this year, Macquarie working in partnership with the FTSE Group, introduced the Macquarie Global Infrastructure Index (MGII). The Australian-based bank will use the index to develop new index-linked products, such as indexed infrastructure funds, some of which could be available to the public by the end of year. Macquarie also introduced an infrastructure investment solely for distribution to the bank's institutional clients.
'For the first time, investors can get exposure to the largest listed infrastructure companies across the developed markets, and indeed the world, instead of just having to buy a single listed stock in their home market,' Mr McIlhagga says.
Since 2000 Macquarie's index has gained 10.4 per cent per annum, outperforming the FTSE Global Equity Index and JPMorgan's Global Bond Index, which have returned 1.3 per cent and 8.6 per cent per annum, respectively.
Macquarie has invested more than A$28 billion in related listed and unlisted vehicles across 16 countries, including Australia, the UK, Canada, the US and South Korea.
The Singapore-listed Macquarie International Infrastructure Fund which debuted in May and had both public and institutional tranches. So far the fund has paid out an interim dividend of 2.2 cents per share, as compared to a forecast of 1.8 to 2.3 cents. In December, the fund expects to issue a dividend yielding in the range of 2.8 per cent to 3.5 per cent.
The fund allocates 31 per cent to airports, 43 per cent to communications infrastructure, 11 per cent to diversified infrastructure and 15 per cent to energy and utilities, with the aim to generate attractive cash yield and double-digit internal rate of returns.
The MGII 100 index has stocks in electricity, pipelines, transportation services and water. These include companies like Exelon Corporation, Duke Energy Corporation, Tokyo Gas, Kinder Morgan, American Tower Corporation and Veolia Environment, Hong Kong and China Gas and China Light and Power.
While one might be tempted to just pick up local stocks rather than buy into the index, doing the latter brings diversity to a portfolio.
'It is the same as with any index; diversity is important rather than buying just one component from it,' Mr McIlhagga says.
'For the first time, Asian investors can get access to infrastructure assets which are located around the globe rather than just buying local assets.'