As interest rates rise, infrastructure investors can look to utilities.
Along with offering stable returns, these companies are highly regulated and, as such, are “generally protected from increases in interest rates and, particularly, from increases in real interest rates,” says Nick Langley, senior portfolio manager at RARE Infrastructure in Sydney, Australia. He manages the Renaissance Global Infrastructure Fund.
This will help investors, he adds, since interest rates will likely rise throughout the rest of 2014 and in 2015.
He expects this will occur primarily in the U.S. and U.K. due to recent economic upticks. “We started to see that come through in Q2 in the U.S, and we’ve seen good evidence of that in the U.K.”
As well, Langley expects investors to zero in on the infrastructure sector. “As economic activity picks up,” he explains, “we’ll see the market begin to realize the value in the rail companies and wireless tower companies.” Then, “those companies will become more fully valued and we’ll be recycling capital out of those positions.”
To prepare for the shift, he’s already investing more in utilities, which “represent a good risk-adjusted return to add to the portfolio.”