19 July 2023
Listed infrastructure is emerging as the quiet achiever in a diversified portfolio. As well as having the potential to provide stable long-term cash flow and liquidity, it’s a real asset that is also doing a lot of heavy lifting on the path to net zero.
Imagine turning on the shower, but no water comes out. Or trying to work without access to electricity or the internet. We assume essential services such as water, energy, road networks or telecommunications will always be there when we need them. It’s only when there’s service disruption – as Europe realised when the Ukraine conflict affected gas supplies – that we realise just how necessary infrastructure is.
Since its inception in 2004, listed infrastructure as an asset class has emerged as a distinct allocation in a diversified portfolio – yet it is still relatively under-researched and overlooked – and we believe this makes it a compelling opportunity. With so much innovation driving decarbonisation and digitalisation, there’s no doubt infrastructure is going through a fascinating period of change.
There is infrastructure that is essential for our daily survival – like water. And there’s infrastructure that is essential to keep our economy moving and growing – such as toll roads, airports or rail. Both share three key characteristics that have the potential to deliver stable and predictable income over time.
1. Vital for everyday life
Infrastructure demand is relatively inelastic, making it fairly stable during periods of economic downturn. It is also playing an important role in the transition to a low carbon economy, which is creating a massive tailwind of capital coming into the utility and transportation sectors.
2. High barriers to entry
Some real assets are natural monopolies, such as wastewater networks, where it doesn’t make economic sense to replicate the asset within a defined geographic area. Some have monopolistic positions, for example, a toll road in an urban area. There might be an alternative route, but the toll road service is substantially better.
3. Regulatory frameworks
In most industries, regulation is perceived as a constraint. But for infrastructure, regulation can often protect the healthy growth of assets over time by giving providers contractual certainty over cash flow. For example, CPI-linked tariff increases are typically included in a concession agreement for a toll road. This also makes infrastructure one of very few asset classes that can often have a direct linkage to inflation – making it highly effective as an inflation hedge.
Why invest in listed infrastructure?
Investing in publicly listed entities that own the infrastructure provides an additional liquidity advantage to an asset class that would otherwise have high entry costs.
Daily liquidity makes it possible for an experienced infrastructure investment manager to take advantage of mispricing in the market. Because infrastructure assets have different attributes to other equities, the market tends to be inefficient at pricing. Just 4% of global equities are infrastructure1, so by focusing on a small number of listed companies, a specialist team can find opportunities that might otherwise be missed – because daily pricing does not tend to reflect the underlying risks or fundamentals.
Listed investments also provide direct access to a very large investible market opportunity, with over US$3 trillion of equity2. From electricity, water, gas, telecommunication and energy infrastructure to ‘STAR’ transportation assets (seaports, toll roads, airports, and rail) there's a diverse spread, and it's available now.
And finally, infrastructure companies tend to have longevity. Often they are privatised or ex-public entities, and mature businesses with long-term potential for growth. Many have been around for decades, and have a long track record of consistent delivery of distributions.
Of course, listed infrastructure assets are a subset of equity investments, which makes them more volatile than unlisted infrastructure markets. We may only have indirect control over the company, but we can be active users of our proxy voting rights.
Investing in a net zero future
Infrastructure and utilities assets are also playing an outsized role in the economy’s transition to decarbonisation. Although they make up just 4% of MSCI World assets, they have delivered 107% of decarbonisation since 20103. The International Energy Agency expects renewables, hydrogen, transport, wind and solar to represent around two-thirds of the contribution to decarbonisation by 20504.
One example of infrastructure’s potential impact is SSE, one of the UK’s largest generators of renewable energy. When we first analysed SSE in 2005, 41% of its electricity generation capacity was coal-fired and 44% gas-fired.
The company exited its last coal-fired power plant in 20205, and reduced its total greenhouse gas emissions by 35% between 2017/18 and 2021/226. It owns leases for significant tracts of offshore seabed, and has the largest offshore wind development pipeline in the UK and Ireland. These are long term assets that will support the electrification of the UK’s energy sector.
Electrification of the economy and increased focus on energy security is driving demand for more low-cost, low-carbon power generation assets. Utilities producing this primary energy, along with associated network assets, are expected to see strong growth in demand. Plus for every dollar these businesses invest, they are typically able to generate an agreed return thanks to the underpinning regulatory frameworks.
Decades of potential ahead
As an asset class, infrastructure has the potential to provide predictable, stable cash flows over time. And the companies are also likely to be around for a long time. This is not a short-term thematics play, but an investment in a resilient future.
Having watched the energy transition journey for almost two decades, Macquarie Asset Management’s listed infrastructure team is well prepared to allocate capital to these opportunities. And in turn, invest in the potential to strengthen energy security and economic growth, and improve daily life for millions of people around the world.
Learn more about the Macquarie International Infrastructure Securities Fund (Hedged).
1 Data as of 31 December 2022 , Factset. Overlap of the S&P Global Infrastructure Index with the MSCI world Index constituents and additional ‘Utility’ stocks within the MSCI World Index.
2 Macquarie’s database of stocks.
3 Data as of Dec 31 2022. Carbon emissions data sourced from Bloomberg, Scope 1 and Scope 2 emissions (Field EG016) represents estimated scope 1 and scope 2 emissions in thousands of metric tonnes of carbon dioxide equivalent per annum as estimated by Bloomberg.
4 IEA Report, May 2023.
5 S&P Global Market Intelligence, SSE closes its last coal-fired power station in UK, 2020.
6 SSE PLC Sustainability Report, 2020, p.25
Important information: The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
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