Infrastructure for inflation protection, income and diversification

Alex Araujo

More and more investors today are wanting to add infrastructure to their portfolios for its inflation protection, income and diversification benefits, and are able to access it more easily through funds that invest in listed infrastructure.

Far from being a boring asset class focused solely on traditional projects like roads, bridges and utilities, listed infrastructure today includes renewable energy solutions, health, educational and civic facilities as well as an array of ‘evolving infrastructure’ needed for the global digital economy. Think cellphone towers, data centres, satellite infrastructure, and optical networks, to name a few.

Around the world inflation is pushing up the cost of living. According to Alex Araujo, who manages the M&G Investments Global Listed Infrastructure Fund, the only way for investors to truly address the effects of inflation on the cost of living is to access a growing income stream, which means investing in companies capable of growing their dividends and weathering economic downturns.

Speaking at a presentation in Cape Town, he said that as a long-term investment, listed infrastructure can provide this. In addition, as an increasingly varied asset class it also gives investors the benefits of diversification - often touted as the first rule of successful investing.

From decarbonisation to energy security

Investors have always focused on the decarbonising benefits of renewable energy. According to Araujo, however, the Russian invasion of Ukraine has highlighted the importance of energy security, and the consequent surge in global energy prices has underscored the necessity of not just alternative sources of geographic supply, but also alternative sources of energy.

“Renewable energy will eventually replace some of our energy needs; but moving to renewables is not that simple, however, and can’t be achieved at short notice,” he said. This means there are opportunities in the nearer-term via companies already helping deliver essentials like electricity and natural gas.

Looking at the electrification of transportation as an example, transmission networks and low-voltage distribution networks need to be built and stabilised before electric transport facilities can become widespread. And the electrification of heat in homes requires two-way networks and heat exchangers.

“While these requirements take time, they also provide investment opportunities into a wide range of companies that are already benefiting from the opportunity to deploy these kinds of assets throughout the value chain,” Araujo said.

Turning to natural gas, he said that while it has traditionally been seen as a transition fuel that can replace coal-fired power and heat until renewables such as solar, wind and hydropower go mainstream, investment opportunities in natural gas will continue for some time to come.

“There are investment opportunities right now from production through to distribution. These include everything from collecting royalties on natural gas production, to processing it by separating it into its component parts, transporting it over long distances, liquifying it and ultimately re-gassifying it.”

Utilities at the centre

Utilities have typically formed the foundation of many infrastructure funds because of their ability to produce returns which, while not exciting, are at least consistent. Still, utility returns have beaten general equity returns over the last 20 years: the global equity market has generated an annual return of 4.6%; utilities, on the other hand, have produced a 6.1% annual return (both in US$). And that’s for the whole of the sector. “We obviously pick the opportunities that are the most exciting,” Araujo said.

“While this asset class is often ignored, it has a remarkable compounding ability over time and is at the centre of the global energy transition that is occurring. Utilities are the deployers of renewable energy and are also putting infrastructure in place to ensure energy security.”

Finally, Araujo stressed the multi-decade nature of listed infrastructure investments and said that M&G Investments focuses on companies whose fortunes are tied to physical assets, especially those not easily replicated. “We look for strategic assets with a physical backing and don’t violate ESG requirements.”

M&G Investments will be applying to make the M&G Global Infrastructure Fund available for investors in South Africa under Section 65 of the Collective Investment Schemes Control Act (CISCA).