Infrastructure investors should consider the benefits of active management.
So says Nick Langley, investment director and senior portfolio manager of RARE Infrastructure in Sydney. His firm manages the Renaissance Global Infrastructure Fund.
And that’s because “infrastructure still forms a relatively small portion of the global equities market,” he adds. “[It makes up] 4%-to-5% of the MSCI world index. And infrastructure companies are a little different from other general equities companies since they have long-dated assets and long-running capital expenditure programs.”
Understanding how these companies are regulated can also be tricky. As such, Langley says clients should seek a team of specialty analysts, as well as portfolio managers who have deep knowledge of the infrastructure sector.
He finds managers working in this space “know how to combine these assets within a portfolio to provide you with a stable return profile over a longer period of time.”
What’s more, choosing infrastructure stocks isn’t as simple “as going out and purchasing an index because infrastructure companies have different return profiles depending on where you are in the economic cycle,” says Langley.
Case in point: early on in the cycle—where both Canada and his native Australia are sitting now—GDP starts to improve and build toward growth as a recession ends. During this time, people should boost exposure to GDP-leveraged stocks like toll roads, airports, and rail and shipping port companies.
As they move through the cycle, he says these companies will “provide high earnings and dividend growth. But as you get to the tail end of the cycle, [investors] need to need to be moving out of those types of these companies and into more stable utilities [since] they’re more defensive and higher on income.”
This shift helps hedge against low-growth and sudden dips in value. Langley adds, “If you go through a low-growth portion, [utilities stocks] will perform very well,” while port and toll road holdings may perform poorly.
He says advisors should also consider that “if people are in an index with a constrained [structure], they’re going to get [equal] exposure to both of those worlds.” If they’re with an active manager, however, they’re going to be able to [control] their exposures, meaning they can lower their risk and boost their returns throughout the economic cycle.
Canada and Australia have similar economies, points out Langley, since both are heavily driven by resources and strong finance sectors. He adds that “getting exposure to international equities through the Canadian or Australian dollar exposes you to movement in currency and also uncertainty and volatility.”
Infrastructure, on the other hand, is at the lower volatility end of the spectrum of global equities, he adds. “[The sector] has a strong underlying growth profile that’s driven by monopoly assets that are regulated.”
He also says the sector offers a lower risk alternative when it comes to accessing GDP growth around the world. Infrastructure stocks have low correlation to resource and finance domestic indices, so they can also provide diversification for clients.