Notwithstanding the political and superannuation industry talk of an infrastructure-led economic recovery in Australia, and elsewhere, the listed infrastructure sector has been looking decidedly unloved of late. And much of the sector’s underperformance against the broader market this year has not been justified in terms of company earnings.
Guiseppe Corona, the London-based head of global listed infrastructure for AMP Capital, told a client webinar last week (September 16) that to understand what had been a relatively “unique period” for the sector, investors needed to think about its makeup. About 45 per cent is in transport and energy, which have been the most adversely affected, and 55 per cent in defensive utilities and communications, which have fared better.
“About 65 per cent of the sector’s share price decline of 20 per cent in the first quarter was not justified by company earnings,” Corona said. “For example, Gibson Energy, a Canadian-based company which is one of AMP’s four largest portfolio investments, now has a valuation approaching what it had in 2015-16. It was down 50 per cent in less than a month. This is despite having a much better cash flow profile than it had previously. For us, what was happening in the market then was a complete joke. It pains us because our investors lost money. But now it has almost fully recovered, down about 6-7 per cent.”
He said that AMP took advantage of the dislocation, where the markets had over-reacted to the downturn. “Companies like Gibson are a no-brainer. Gibson is the owner of storage facilities and its assets actually became more valuable,” he said.
Within the energy infrastructure sector there were parts of the industry which did well. Gas assets (flavour of the month with the Australian government) which are not associated with oil did fairly well, according to Joseph Titmus, a Sydney-based portfolio manager. He said: “Communications sector growth has been at a very high rate, but we think that is fully reflected in valuations, so we are underweight… North America was the most negative region in the year to date, while Australia was slightly positive.”
Asked about the AMP listed infrastructure fund’s local exposure, he said: “We’re a small country with only a handful of listed infrastructure companies compared with hundreds globally. We will never land with a big weighting. We added a couple of [Australian] stocks this year due to some dislocation. But valuations have been historically elevated in Australia. Our Australian exposure is less than 5 per cent.”
AMP’s two over-riding factors driving its listed infrastructure style are value and quality. Other types of managers, such as growth and momentum managers, may not be so shy of what AMP considers over-valued local stocks. One of the anomalies of listed infrastructure in general, and particularly in Australia, is that there has for several years been little-to-no premium paid for liquidity compared with the private market infrastructure projects which dominate the infrastructure exposures of big super funds. Sometimes it is possible to buy a piece of a particular project more cheaply through the listed market than the private market, despite the liquidity advantage of the listed market. In the case of the AMP Capital Global Infrastructure Securities Fund – unhedged – further liquidity is available to individual investors through its BetaShares ETF version of the strategy (ASX code: GLIN).
The absolute performance of the AMP fund has been good, largely delivering on the past medium-long-term target return of 10 per cent after fees per year, notwithstanding the listed sector’s poor performance over the past 12 months to August 31. The AMP fund beat its benchmark Dow Jones Brookfield Global Infrastructure Index with minus 11.0 per cent (after fees) against the index’s minus 14.2 per cent, although that is probably cold comfort for investors. It also beat the index by 1.3 per cent with a 5.5 per cent return over three years, was line-ball with the index over five and seven years and slightly ahead of its medium-long-term target with 10.9 per cent over 10 years.
Unfortunately, while the long-term performance was commendably true to label, so was the index. The benchmark also returned 10.9 per cent over 10 years, which does nothing to dissuade us from continuing the argument about active versus passive management. In listed infrastructure, possibly more than most asset sub-classes, there will always be room for active managers who are historically more likely to outperform passive in down markets.
About $2.2 billion of AMP Capital’s $33 billion in total infrastructure investments are in its listed portfolios. The firm has seven specialists handling the listed market – four in London and three in Sydney – alongside a total of 90 staff working on infrastructure around the world. It has a universe of stocks from which to choose of about 600 but distils this down to a core of 200 which suit its quality and value requirements.
