South African investors have historically been underexposed to global listed infrastructure. However, changes to Regulation 28 of the Pension Funds Act could open the opportunity set for investors seeking to diversify into this unique asset class.
The definition of “infrastructure” published in January 2023 refers to: “assets with the main objective of developing, constructing or maintaining physical assets and technology to provide utilities, services or facilities to the benefit of the economy, business or the public. It includes private sector developments as well as traditional public sector projects”. Furthermore, retirement funds are now allowed to invest in infrastructure, up to a total limit of 45% across all asset classes (excluding any debt issued by or guaranteed by the SA government).
Listed infrastructure is therefore buying shares in the listed companies that own or control strategic physical infrastructure assets with high dividend growth potential over the long term.
From a portfolio construction perspective, there are some compelling reasons for local investors to consider adding global listed infrastructure exposure to their asset allocation mix.
Protects on the downside
One of the key features of this asset class and strategy is its ability to preserve capital in difficult market conditions. Take a recent example in 2022 where the global equity market was down more than 18% in dollar terms. The traditional utilities sector was instrumental in delivering downside protection that protected investors against half of the market drop.
And when markets recover, the infrastructure based portfolio is generally positioned to benefit from that upside participation where it has a growth focus and a wide opportunity set within the its holdings.
Defensive in nature
Listed infrastructure companies demonstrate defensive qualities of protecting capital during market downturns. This is particularly true in the social infrastructure component, covering infrastructure providing health, education and civic functions. The characteristics of this component tend to add defensive qualities and typically have a guaranteed revenue stream (most often coming from governments) for the infrastructure provided, with good dividend yield that tends to grow with inflation over time, regardless of market movements.
Provides a stable, growing income over the long term
Listed infrastructure investments tend to be geared to the longer term. Unlike private equity, listed infrastructure unit trusts offer far more liquidity and flexibility. The structural growth potential within the global listed infrastructure sector makes it increasingly appealing for those seeking stable and growing long term income. Investors should seek companies, such as utilities companies, that are consistently able to compound their earnings, cash flow and dividend growth because of the nature of their businesses and assets. This income growth and compounding over time serve as an inflation buffer.
Adds layers of diversification
Infrastructure has a low correlation to traditional asset classes. It can also be viewed as complementary, or as an alternative to, global equity.
The broader definition of “infrastructure” (that is, covering economic, social and evolving components) by its nature already adds layers of diversification. The underlying return constituents of each of the three categories of infrastructure tend to move in different ways in various market cycles, adding more layers of diversification. Furthermore, there is diversification across the categories sectors, and subsectors, as well as geographic diversification in portfolios with globally focused strategies.
Investing for real world impact
Investing in global listed infrastructure gives investors an opportunity to invest for impact by contributing to the long term socio economic benefits of a country or region.
Through this strategy, investors can invest in powerful long term themes and multi decade trends, such as renewable energy and energy security, transportation of the future and universal connectivity, to name a few. Asset managers remain optimistic about the longer term growth prospects for listed infrastructure driven by powerful structural trends, such as artificial intelligence and the global green energy transition and energy security.
A solid building block
Given the above reasons and its long term nature, infrastructure can be considered as a good match with retirement savings. This relatively new asset class is poised to benefit from structural growth trends and headwinds turning into tailwinds, such as interest rates peaking globally and potential rate cuts expected, making it an appealing option for any long term investor.
