Principal, Associate Portfolio Manager, Infrastructure
You might remember last year when I wrote a few mid-week posts on global listed infrastructure topics. I explained back then: in exchange for the weekly posts that we publish free of charge, you might have to endure some posts about listed infrastructure, a topic you likely did not come to “MLPguy” to hear about. Last year, we highlighted that investors should be looking at listed infrastructure as a better alternative to MLP allocations. As with last year, ignore this message at your own peril, based on results we share below.
We have many readers of the blog who are decision makers at consulting firms and pension funds and endowments. This message is mostly directed towards institutional investors, but it can also apply to individual investors.
The message is simple:
Infrastructure: Consistent Performance
The chart below compares annual gross total returns of infrastructure to the various midstream indexes. Over the long-term, infrastructure has provided a consistent, positive return you look for when allocating to income-producing real assets.
Infrastructure has dramatically outperformed midstream over 10 years, but it has underperformed the S&P 500. Infrastructure’s return is driven by the current income plus income growth that the asset class delivers due to reinvestment. In fact, dividend growth over the last 20 years has been a compounded 7% while the dividend yield has been about 3.5%. Unsurprisingly adding the two together is the long-term return! The return has not been driven by multiple expansion, which may surprise you. In fact, multiples remain well below those in the private market which signals a wide valuation discount in the listed market relative to private market valuations, which my colleague Dan Foley recently wrote about.
We could be accused of some bias, because we do manage a global listed infrastructure strategy, but we also believe the future is very bright for global listed infrastructure. Exciting things are happening across infrastructure, including several secular growth themes. It is a sensible replacement for what you hoped for when you invested in midstream.
Infrastructure: Lower Volatility
In the chart below, we highlight the volatility of the FTSE Global Infrastructure Core 50/50 Index vs. the Alerian MLP Index and vs. the S&P 500. In addition to midstream lagging in returns, it is doing so with higher volatility. It’s not what you look for.
Update on Dividend Growth
Over the long-term, consistent dividend growth from infrastructure has added up to a very large positive number, compared with the negative number for MLPs. You pay more up front for that dividend consistency and visibility, but over time you end up at a higher number.
Midstream Universe Update, Comparison to Infrastructure Universe
We have not been shy about sharing our thoughts on the devolution of the MLP market, from 100+ MLPs with seemingly endless liquidity down to a shrinking group of less than 20 investible midstream MLPs (as noted recently in this 10-year blogiversary piece).
In the chart below, however, we add a column off to the right that compares the midstream universe to the much larger global listed infrastructure universe. Lower concentration in the infrastructure universe allows for more opportunities to be active and to add value by positioning the portfolio in a way that is different than the universe or index weights.
The knee jerk reaction to the chart above might be that 49 names seems like plenty to justify an allocation to a broader midstream strategy. Maybe on its face, but digging into the trends we monitor closely here, there are a few items worth noting:
Conclusion: Take a Step Back, See the Big Picture
Focusing on a niche and figuring it out can have a happy ending, like in the Dr. Suess classic story Horton Hears a Who!
But other times it doesn’t pay. Those of us who follow the midstream sector closely can get caught up in the daily drama and miss broader forces at work. We can get myopically fixated on an artificially high yield rather than fundamental, regulatory or capital markets headwinds.
Taking a step back can change your perspective. Like at the end of the original Men in Black when the camera zooms out, then zooms out billions of times more to show our planet within a galaxy within a universe that’s ultimately inside of a ball being played with by an alien somewhere. Midstream isn’t quite that small in relation to the broad market, but you get the point.
Rather than wait for the next downdraft in midstream, take a fresh look today and make sure you are getting what you signed up for with midstream. Food for thought as you enjoy the midstream January effect.
CBRE Clarion manages a global listed infrastructure strategy on behalf of institutional clients. We are sub-advisor for a mutual fund here in the U.S., a global UCITs fund and a fund in Australia. Our infrastructure strategy track record is approaching its 8-year anniversary.