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Audience

Downside protection without forgoing upside

21/11/2018

The defensive qualities of listed infrastructure came to the fore in October’s market downturn, but the asset class has not always been seen in a favourable light during 2018. In January and February, bond proxies and, by association, many infrastructure stocks were sold off indiscriminately as investors became increasingly concerned about the pace of rising interest rates.

Economic infrastructure, which covers utilities, energy and transport, was the hardest hit alongside companies structured as REITs. Some compelling valuation opportunities emerged, leading us to buy aggressively into the weakness. The relative performance of utilities, for example, reached levels not seen in 20 years.

Past performance is not a guide to future performance.

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It was not just sentiment and valuation that prompted this course of action. We were also motivated by the belief that our holdings – all of which pay growing dividends, reflecting the growth in the underlying businesses – should not be treated as bond proxies, which, by definition, offer a high yield with no growth. The attraction of infrastructure is not limited to low volatility; the asset class offers a wide array of growth opportunities to drive attractive returns over the long term.

Our utilities holdings, for example, are harnessing structural growth trends, such as society’s transition to renewable power, or the adoption of electric and autonomous vehicles. Our holdings structured as REITs, dominated by owners or operators of data centres and wireless communications towers, are capitalising on the tailwind of digitalisation. Indeed, because of our emphasis on growth and the fact that many listed infrastructure businesses benefit from the economic growth and inflation that drive interest rates higher, we find that the financial impact of interest rates on our holdings is negligible.

Many of the stocks to which we added have featured prominently among the top contributors to performance since this phase. However, we see further upside in these positions as valuations continue to look depressed. Economic infrastructure looks particularly compelling, both relative to history and the other segments of listed infrastructure, namely social (health, education and security) and evolving (communication, transactional and royalty).

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However, we believe that it is important to extend the definition of infrastructure beyond the traditional realm of economic to better reflect the increasingly digital world we live in. The social and evolving categories provide benefits of diversification as well as valuation opportunities depending on the market environment.

We must also not lose sight of the long-term nature of the asset class. Short-term monetary policy decisions will not materially affect the long-term performance of these exceptionally long-life assets and the companies that own or control them. Powerful shifts in society’s needs and activities – and the implications for infrastructure use – will have a greater bearing on listed infrastructure’s long-term performance.

The value of investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

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The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
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