However the global financial meltdown could spur more privatisation on US shores and with pension funds seeking diversification through uncorrelated assets post-crisis, global listed infrastructure may prove to be one of the beneficiaries. Bruce Eidelson, San Diego-based director, real estate securities at Russell Investments, says he’d expect to see more privatisation in America given the deficiencies in US infrastructure and constrained government budgets. “Those fiscal constraints should lead to increased privatisation along the same lines as what we’ve seen [in Australia] but it hasn’t happened to the same extent,” he says. With localities at the metropolitan level unable to borrow to the degree that Federal Government is able to, Eidelson says they are looking for opportunities to capitalise on infrastructure assets that may be in place, but also to secure sources of capital in financing to expand current resources. “It’s an ideal opportunity for increased privatisation,” he says.
This, in turn, could drive US funds to consider allocating to infrastructure, but given its emerging asset class nature, Eidelson expects initial allocations to sit below the average weighting to property, which for US funds typically ranges from 5 to 10 per cent. Any allocation less than 2 to 3 per cent “would not be meaningful”, Eidelson says, adding that it sits best in the defensive segment of equity portfolios. In the wake of the crisis and share price collapse of a number of infrastructure vehicles, some investors have questioned the viability of the infrastructure model. Others, like the C$26.7 billion Hospitals of Ontario Pension Plan, don’t see it as a separate asset class, preferring instead to view it as an equity or debt deal.
However Eidelson says the characteristics of the underlying assets, which are real and tangible as distinct from many sectors in the broader equity markets, suggest infrastructure belongs in an asset class of its own. “In essence it’s akin to property, albeit with longer duration cash flows,” he says. “That tends to argue for consideration of infrastructure as a distinct asset class or certainly as a distinct sector within the broader equity market.” For funds wary of making an allocation, he points to the fundamentals of the asset class, and says many of the issues that emerged following the crisis revolved around the high gearing levels of those companies. “What we’re focusing on here is the character of the underlying infrastructure assets which continue to present certain benefits in terms of stability of income,” he says.
“That hasn’t changed, in fact if anything investors are looking for more stable income sources post-crisis in many cases than beforehand so infrastructure should be well positioned.” Due to its reliance on bricks-andmortar assets rather than the vagaries of financial markets, infrastructure tends to sit in the ‘defensive’ portion of pension portfolios. Most infrastructure assets, such as utilities, transportation and energy, have legal or economic market monopolies, or quasi-monopolies, meaning their returns are not subject to competitive market forces. According to Eidelson, the yields also tend to be higher than you might find in the broader equity markets. Infrastructure assets certainly offer some bond-like characteristics, including stable income and cash flow streams, but the listed sector bears higher correlation to equities than unlisted infrastructure.
The S&P Global Infrastructure Index, which provides liquid and tradable exposure to 75 companies globally that represent the listed infrastructure universe, took a battering in 2008, returning -38.98 per cent in the 12 months to the end of December. Like most asset classes, the index has since recovered ground, posting a 13.29 per cent return year-to-date. “These are long-duration assets in terms of cash flow stability that would provide some bond-like characteristics, but thay are assets traded on equity markets so there would be more equitylike characteristics than you’d find in a fixed interest portfolio,” Eidelson says.