Infrastructure’s standing as a defensive asset class is in question after it was hammered last month, falling more than the overall sharemarket and most other assets.
The S&P Global Infrastructure Index (AUD) fell 23.1 per cent in March and has fallen 28.1 per cent so far this year.
Another infrastructure index, the Morningstar Global Infrastructure Index (AUD), fell 19.3 per cent last month and has fallen 15.9 per cent so far this year.
The Australian share market index, the S&P/ASX 200 Total Return Index fell 20.6 per cent last month and 23.1 per cent so far this year.
The head of infrastructure at Magellan Financial Group, Gerald Stack, says: “We believe infrastructure remains a diversifier for an investment portfolio, notwithstanding that in the face of pandemic the investment option has been highly correlated to the broader equities market.
“In this situation, transport infrastructure, which represents a significant proportion of the infrastructure universe, is exposed to the same factors affecting broader equity markets – the lockout of consumers from physical commerce. As a result, infrastructure investment performance through the first quarter of 2020 has been correlated with equity markets.”
“Notwithstanding the performance through this crisis, we believe that the investment returns from infrastructure typically reflect different underlying drivers to broader equity markets. This will ultimately mean infrastructure diversifies an investment portfolio.”
The Magellan Infrastructure Fund is a global stock portfolio made up of 45 per cent utility companies, 40 per cent infrastructure, such as toll roads and airports, and 15 per cent cash. The fund is down 18.9 per cent over the three months to the end of March.
Stack says that within the sector there have been some big disparities. Airport stocks fell more than 40 per cent during the March quarter, toll roads lost around 25 per cent and energy infrastructure was down 12 per cent. Communications infrastructure actually rose 4 per cent.
“The problem for airports, toll roads and rail segments is that they face significant short-term declines in patronage. With airports and toll roads, we expect a significant drop in passenger movements and car trips but we assess that our companies have sufficient cash flow and liquidity to cope.
“If you take the 41 per cent drop for airport operators for the March quarter, we estimate that investors are pricing in something like a six-month interruption in passenger numbers, followed by a slow recovery. If the interruption is shorter then airport stocks could claw back some of their losses.”
“While we expect that some of these companies will reduce their dividends in the short term, our experience of previous demand shocks in the transport industry gives us confidence that the demand for transport will recover over the longer term.
“Our rail companies are from Canada and the United States. These businesses are diversified across a range of segments and we would expect volume losses due to supply interruptions and economic decline to be recouped as the US economy recovers.”
Stack says demand patterns for transport infrastructure have historically been consistent and predictable but current circumstances are extraordinary.
“We have reviewed the balance sheets and forecast cash flows for the companies in our portfolio. Our companies are generally in strong positions in terms of solvency for at least the next six months,” he says.
RARE Infrastructure co-founder and senior portfolio manager, Nick Langley, says: “Since the current selldown began in February, regulated sectors, such as electric and water utilities, have help up well compared with equities. However, the impact of the shutdown on transport assets such as airports and toll roads has affected these companies sharply.
RARE’s most defensive portfolio is its Infrastructure Income Fund, which has a bias to utility sectors. Electric, gas and water utilities make up 85 per cent of the holdings in the portfolio.
Langley says earnings are linked to the underlying asset base, rather than the economic cycle. “So, while stock prices of these companies may be affected by board market sell-offs, their resilient earnings and cash flow profile gives us confidence that the stock price will bounce back once fundamentals become the key driver again.”
The Infrastructure Income Fund fell 4.1 per cent in February. The S&P Global Infrastructure Index was down 9 per cent over the same period.