Global Listed Infrastructure – GLI101
What is Global Listed Infrastructure (GLI)?
GLIO maintains a tightly defined opportunity set of global listed infrastructure companies - the GLIO Coverage. These companies are focused on the ownership, development, management and operation of infrastructure assets. These assets can be defined as 'mission critical' to the economic and social functioning of many parts of the global economy.
These companies will fall under the headline categories: regulated utilities, energy transportation infrastructure, transportation and communications infrastructure. Each headline sector is comprised of more granular infrastructure sub-sectors. It is worth noting that the GLIO Coverage only accounts for 5% of the broader MSCI World Index.
What's the GLI Opportunity?
Global Listed Infrastructure (GLI) is an asset class that has emerged over the past decade as investors seek greater exposure to real assets. In simple terms, real assets is a combination of infrastructure and real estate. Global listed real estate investment has grown tremendously over recent decades, helped by the introduction of Real Estate Investment Trusts (REITs) across the globe.
Many investors believe GLI is in the early stages of a similar development. The phase "the development of GLI feels like REITs 20 years ago" is commonly heard.
GLIO was founded in 2016 to represent and promote the interests of the listed infrastructure companies and institutional investors in the asset class.
How has the asset class grown?
The total market capitalization of the global listed infrastructure companies has grown considerably since 1999 (CAGR +10.4%). The current market capitalization of the asset class is approximatley $2.5 trillion. In terms of free float, on average at least 85% of shares are freely traded which means that investors can build exposure to core infrastructure relatively easily.
Effectively, listed infrastructure companies offer liquid access to illiquid assets. The dry powder from unlisted infrastructure funds is now at a record high, and the issue is compounded by a scarcity of core infrastructure assets. In contrast, the liquidity of listed infrastructure enables new allocations to be deployed with a high degree of efficiency. Importantly, liquidity enables active managers to adjust portfolios according to their convictions.
Does GLI offer attractive regular income?
Historically, global listed infrastructure has offered an attractive income component as a portion of the overall total shareholder returns. The asset class has offered higher yields compared against global equities consistently over a long period of time. On average, since 2003 global listed infrastructure yielded approximately 3.6%, versus 2.6% for global equities. Global utilities averaged 4.1% over the same period.
These regular shareholder payouts are underpinned by higher sustainable cash yields which provide companies with the opportunity to raise payout ratios if required. This is particularly evident among the transportation-focused companies like freight rail and highways & toll-roads.
How do GLI valuations compare vs private asset transactions?
To compare the unlisted and listed infrastructure valuations it is common to use EV/EBITDA multiples. In the example below, we look at the global airports sector over a 12-year period. The blue circles represent individual airport asset deals. The dark blue line represents the average EV/EBITDA ratio of the listed airport sector.
It is clear from the example, listed airports offer ‘better value for money’ compared against transacting individual airport assets. The question of diversification (one asset versus a diverse exposure across a number of assets) and management quality and experience can also be raised here.
It is worth noting here that many of the listed airports own some of the world’s most best performing assets in terms of passenger volumes and customer experience/quality.
Why own GLI?
Listed infrastructure companies tend to own long-lived assets that provide essential services to society, such utilities, energy transportation networks, communications and transportation infrastructure.
These assets can offer stable and predictable cash flows supported by long-term contracts or regulation, with monopolistic characteristics and high barriers to entry. The GLIO Coverage has shown that the asset class exhibits compelling investment characteristics over the short, medium and long term at significantly lower levels of volatility (300bps) compared against equities.
How can I invest in GLI?
There are a growing number of active investment managers who specialize in investing in global listed infrastructure companies, as part of a globally diversified portfolio.
This active manager offering has grown from a handful of managers in 2008 to approximately 60 in currently managing over $90bn in funds under management.
Does GLI really provide infrastructure exposure?
Infrastructure assets with the same economic exposures will respond similarly to changes in the economic environment. However, the types of vehicle in which these assets are held can be valued using different methods.
Unlisted infrastructure values are based on periodic valuations which lag current market conditions and are inherently smoothed, or even suffer from autocorrelation. Listed company valuations are subject to daily pricing and are more volatile by nature over the short term. Of course, this can create opportunities for active global listed infrastructure managers.
Putting aside short-term differences in valuation, GLIO research highlights the fact that over the medium to long term, listed infrastructure offers the very similar performance as unlisted infrastructure and vice-versa. Many would argue listed infrastructure can act as an excellent proxy for direct/unlisted infrastructure.
Does GLI offer a hedge against inflation?
Generally speaking, core infrastructure assets will offer investors predictable cash flows. Cash flows are driven by price and volume. Firstly, companies which operate assets in regulatory or concession frameworks often have periodic inflation-linked adjustments, or annual escalators built into contracts. Secondly, economic conditions in a country or region, will drive demand for an infrastructure asset. Of course, these revenue drivers will vary across infrastructure sectors.
The case study presented by Ferrovial in the Issue 3 of the GLIO Journal is a good example in the highways and toll-roads sector.
Is GLI a defensive asset class?
The outperformance of GLI is not a fluke. The asset class has a long track-record of outperformance in a variety of market conditions. Since 2002, GLI captured only 55% of the global equity market downside. In fact, adding GLI is not admitting defeat or betting on a recession. GLI leaves intact the potential for upside as market risks subside. This is evidenced by upside capture versus global equities of more than 85% since 2002.
What will be future drivers of GLI?
The need for infrastructure investment is a never-ending cycle. Looking to the future, Governments will need to offer incentives for infrastructure investment to provide the backbone to boost economic growth.
For example, the poor state of US infrastructure is well documented. The latest American Society of Civil Engineers (ASCE) scorecard makes depressing reading across the range of infrastructure sectors. The overall grade for US infrastructure was D+.
The story is similar across the globe as the percentage of infrastructure investment relative to GDP has declined over recent decades. Subsequently, the infrastructure investment gap has widened with an estimated shortfall of $15tn to 2040 according to GI Hub.
Current and new forms of infrastructure investment vehicles will need to develop and evolve to help address this critical issue. In recent years the USA has seen Yieldcos, MLPs and REITs offer investors exposure to infrastructure with a focus on income. Belgium recently expanded its REIT structure to include infrastructure, India introduced an Infrastructure Trust and Mexico introduced the FIBRA-E.
The opportunity to create a clearly defined Infrastructure Investment Trust (IIT) for economic critical infrastructure could look attractive for governments wishing to attract both domestic and international capital to fill the investment gap.