Listed Infrastructure: investing in the assets that make the world work

by Alex Araujo, Fund Manager at M&G Investments 

For investment professionals only

INFRASTRUCTURE holds an important place in modern society, serving as the backbone of the world economy. The stable and growing cashflows generated by the asset class can be appealing to long-term investors, particularly in an inflationary environment, in Alex Araujo’s opinion.

An essential part of daily life

Infrastructure, in its broadest sense, refers to assets associated with the provision of essential services for the functioning of global society. Utilities such as electricity, gas and water are the most obvious examples of critical physical infrastructure, alongside transportation networks such as toll roads and railways, as well as transport hubs including ports and airports.

We all rely upon infrastructure assets in our everyday lives – from the moment we wake up in the morning to the moment we fall asleep at night. Many of our daily routines are supported by the presence of a physical infrastructure network whose services enable the modern world to run smoothly. Often without knowing it, we touch them several times a day.

Direct investment in unlisted assets is very much the domain of institutional investors. However, we believe investing in the shares of listed businesses that own and control these essential physical infrastructure assets enables a wider audience to benefit from the attractive features of infrastructure investment. In a sense, it democratises the asset class.

Given the important place infrastructure holds in the functioning of every life, and the long-life nature of the assets, we believe listed infrastructure investment can potentially provide a reliable income stream for investors over many years.

This long-term aspect is captured in concession businesses, which can potentially generate stable and growing cashflows over several decades, as well as royalty companies, which provide the ultimate in long-term cashflow streams because the cashflows from their physical landholdings are so long term that they run into perpetuity.

The value and income from 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. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

A diverse investment universe that goes beyond traditional areas

Definitions vary, but we focus on physical assets in infrastructure where we see the physical aspect providing a strategic barrier to entry. This is a crucial distinction. We choose not to invest in service providers such as telecommunications operators, or companies involved in the engineering and construction of infrastructure where access to capital is more likely to determine competitive advantage.

Infrastructure, however, is rapidly expanding beyond the traditional realm of utilities, energy pipelines and transport – which we call economic infrastructure. In order to capture the full breadth of the asset class and the qualities it has to offer, we invest in three distinct infrastructure categories:

  • Economic
  • Social
  • Evolving

Social infrastructure covers facilities for health, education and civic services. This infrastructure class offers similar defensive characteristics to the economic sphere albeit with a different asset base which provides diversification benefits.

Evolving infrastructure, by contrast, adds a unique profile. The growth opportunities in this segment-from communication infrastructure (eg, data centres and communication towers), transactional (payment networks) and royalty (energy and mineral) companies-inject a new dimension to an asset class which has stability at its core.

Creating a balanced portfolio from these three infrastructure classes helps provide a diversified exposure to an asset class which we believe offers compelling characteristics for long-term investors.

Focus on dividend growth

The M&G Global Listed Infrastructure Fund is a high conviction fund holding 40-50 infrastructure companies from all over the world.

Our investments tend to generate stable and growing cashflows (often inflation protected), which in turn allow them to grow their dividend payments.

Our fundamental belief is that investing in companies that are growing their dividends is a successful strategy in the stockmarket over the long run. We believe that a progressive dividend policy helps a company to improve because it instils capital discipline, which allows the business to grow profitably and support a rising dividend stream.

Through the consistent application of this approach, the fund aims to provide a higher total return (the combination of capital growth and income), net of the ongoing charge figure, than that of the MSCI ACWI Index* over any five-year period. It also aims to deliver an income distribution that increases every year in sterling terms.

The value and income from 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. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

Stocks are selected on a bottom-up basis, using fundamental research to assess a company’s dividend growth track record, capital discipline and long-term growth prospects. We invest with a long-term investment horizon, consistent with the long-life nature of infrastructure assets. Valuation is a key consideration in stock selection to ensure the fund is focused on good investments, not just good companies.

*The benchmark is a target which the fund seeks to outperform. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund’s portfolio construction. The fund is actively managed. The fund manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the benchmark’s constituents.

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