Infrastructure ETFs provide a degree of certainty during market volatility

Apr 28th, 2012 | By | Category: Equities

The infrastructure sector, which includes airports, bridges, toll roads, ports, telecommunications towers, power grids, energy pipelines and water facilities, is well placed to provide investors with attractive risk-adjusted returns in 2012.

Infrastructure ETFs provide a degree of certainty during market volatility

In an environment of high inflation and volatility, infrastructure ETFs can provide investors with a degree of inflation protection, risk diversification and income.

According to Peter Meany, fund manager at First State Investments, listed infrastructure companies should continue to benefit from the combination of structural growth, pricing power and lower correlation relative to the broader global equity market.

“In the last ten years, global listed infrastructure companies delivered higher returns with lower risk. During the global credit crisis of 2008/09, earnings of infrastructure companies in the developed world fell by 10% compared to 60% for general equities. This defensive performance reflected the essential demand for infrastructure services plus pricing power from long-term contracts or stable regulation”, says Meany.

FEATURED PRODUCT

iShares FTSE/Macquarie
Global Infrastructure 100 ETF (INFR)

– Tracks the Macquarie Global Infrastructure 100
Index providing access to infrastructure stocks
from developed and advanced emerging countries

– Exposure to infrastructure companies covering
oil & gas pipelines, transportation services,
telecommunications equipment and utilities

– Physical replication with full transparency to
underlying holdings

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, TER 0.65%

Investors are attracted to real infrastructure due to a number of key benefits. First, investment in infrastructure assets can act as a portfolio risk reduction tool due to the sector’s low correlation to the broader global equity market.

Second, infrastructure provides investors with a bond-like return stream. Similar to property investments, a large part of the return from infrastructure is generated as income rather than capital gains, thereby delivering more consistent and less volatile returns over time.

And third, infrastructure can act as a partial hedge against inflation. Due to the near-monopolistic positions of many infrastructure assets, the demand for the asset tends to be relatively price inelastic, meaning price increases linked to inflation tend to do little to deter demand.

In addition to the inherent long-term attractions of infrastructure, First State’s Meany sees near-term opportunities. He believes that, as developed economies implement austerity measures, infrastructure companies could benefit as financially distressed governments divest assets in 2012, including highly valuable infrastructure.

“This will occur in various forms including sell downs of stakes in existing listed infrastructure companies, sales of assets to unlisted or listed operators, privatisations via initial public offerings (IPOs) and unwinding of cross shareholdings. The new governments in southern Europe are already underway in this process, with Portugal the most advanced, and we expect Italy and Spain to join the asset sell-off later this year,” say Meany.

Why invest in infrastructure?

– Essential and irreplaceable services with
inelastic demand provide a hedge against inflation

– Global trend towards PPPs and privatisation of
traditionally public funded assets is driving
rapid growth of infrastructure industry

– Strong cash flows characterised by low volatility
and low correlation with other asset classes make
infrastructure an excellent portfolio holding

– Strong record of performance

Meany also sees potential as governments turn their attention to growth-promoting policies: “We believe that over the coming months we will see new evidence of constructive regulatory environments which will encourage companies to spend capital on maintenance, safety, environmental and new projects, with the added benefit of having a positive economic stimulus impact”

He adds: “On the pricing front, most infrastructure companies enjoy inflation-linked pricing mechanisms which do not destroy demand given the essential nature of their services. In our view, this should provide a degree of certainty to investors, particularly at times of market volatility.”

For investors looking to gain exposure to developed market infrastructure assets, there are a couple of London (LSE) listed ETFs to consider, tracking two different infrastructure indices:

iShares FTSE/Macquarie Global Infrastructure 100 ETF (INFR)
The iShares FTSE/Macquarie Global Infrastructure 100 ETF tracks the Macquarie Global Infrastructure 100 Index. The index offers exposure to the 100 largest stocks from developed and advanced emerging countries of the Macquarie Global Infrastructure Index. The index is comprised solely of companies that are engaged in the management, ownership and/or operation of infrastructure and utility assets. London (LSE) listed. TER 0.65%.

DB X-trackers S&P Global Infrastructure ETF (XSGI)
The DB X-trackers S&P Global Infrastructure ETF tracks the S&P Global Infrastructure Index. This index provides exposure to 75 listed infrastructure companies from around the world across three distinct infrastructure clusters: Utilities, Transportation and Energy. The Energy cluster comprises the areas Oil & Gas Storage and Transportation, the Transportation cluster comprises the areas Airport Services, Highways & Railroads and Marine Ports & Services and the Utilities cluster comprises Electric, Gas and Water. London (LSE) listed. TER 0.60%.

For investors looking to target emerging market infrastructure, the following ETF warrants further attention:

iShares S&P Emerging Market Infrastructure ETF (IEMI)
The iShares S&P Emerging Market Infrastructure ETF tracks the S&P Emerging Markets Infrastructure Index. This index provides exposure to 30 of the largest publicly listed emerging markets companies from around the world, across three distinct infrastructure clusters: Utilities, Transportation, and Energy. London (LSE) listed. TER 0.74%.

(European-based investors should note that many of the above funds are registered for distribution across Europe and/or are cross-listed on European exchanges)

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