The wealth of global infrastructure opportunitieshas expanded greatly over the past 20 years, asgovernments have increased the private sector’srole. The core infrastructure universe identifiedby CBRE Clarion has grown from about $400billion in 1995 to $3.7 trillion in 2017 (Exhibit1). Core infrastructure companies are definedas companies that own long-duration globalinfrastructure assets with a stable demandprofile and low volatility of cashflows. Thesecompanies can be identified through an analysisof underlying assets, business models, andinvestment characteristics.
More than $57 trillion1is needed to fund globalinfrastructure projects in the coming years.This suggests that there’ll be a good supply ofattractive projects in regions that range fromdeveloped to emerging-market countries. This islikely to encourage the continued rise of globalinfrastructure as anasset class.
Listed infrastructure cashflows and dividendsbenefit from contractually driven, inflation-linked revenue growth, which may provide along-term hedge against inflation and risinginterest rates. For example, toll road assets mayoffer inflation protection because long-termcontracts typically tie fees explicitly to inflation.In other instances, such as regulated utilitiesin the U.K. and Italy, returns are set basedon real returns, rather than nominal returns,again allowing for a direct link to inflation.
In addition to inflation-linked revenue, globalinfrastructure companies grow revenuesand income through capital expendituresto upgrade, improve, or enhance existinginfrastructure. Such spending offers them anopportunity to earn a rate of return on theseinvestments in excess of their cost of capital,and drives cashflow growth. Regulatorstypically establish the rate of return such listedinfrastructure companies can earn on theircapital investments, which has typically beenhigher than the companies’ cost of capital.
Listed infrastructure’s historical returns look evenmore attractive when you look at the asset class’historical volatility and compare it with other typesof stocks. As measured by standard deviation,listed infrastructure was significantly less volatilethan other major equity investments, includingU.S. large-cap stocks (Exhibit 6).
Historically, listed infrastructure has contributed to portfolio diversification and portfolio-level risk-adjusted returns. The global universe oflisted infrastructure securities includes a diverse opportunity set of industry sectors that are affected by the economic conditions, regulatory trends, and supply/demand dynamics that are unique to the local markets and sectors in which they operate. As a result, there has historically been a wide disparity of returns generated across the listed infrastructure sectors (Exhibit 7). The gap between the returns for the top-performing and the bottom – performing sectors has exceeded 2500 basis points (30 percent) in the five years from 2013 through 2017. For example, airports returned 36.4 percent vs. -6.5 percent for midstream/pipelines in 2017. The range of total return out comes may further enhance an active manager’s ability to generate attractive total returns while mitigating risk.