Global infrastructure expected to continue perform well despite double dip recession fears, fund expert believes

Written by Ray Clancy

Wednesday, 22 September 2010 10:32

Global infrastructure is set to continue its outperformance regardless of economic conditions and fears over double dip recessions in the US and UK, it is claimed.

Whilst the market continues to be affected by concerns about the possibility of a double dip recession in the US, listed infrastructure is well placed to deliver resilient returns, according to Peter Meany, manager of the First State Global Listed Infrastructure Fund.

The fund aims to provide investors with a mix of strong capital growth and inflation-protected income by investing in a globally diversified portfolio of infrastructure securities.

‘Infrastructure assets performed well during the global financial crisis and subsequent economic downturn. In the period between 2007 and 2009, when most companies struggled, infrastructure companies' earnings actually grew by around 4%. In contrast, earnings for global equities fell by about 25%,’ said Meany.

He points out that whilst a number of the sector’s constituents suffered from inappropriate gearing and poor governance, a quality, diversified and actively managed portfolio invested in infrastructure stocks outperformed the MSCI World Index by more than 20% over three years. ‘This reflected essential demand and pricing power of infrastructure companies, supported by regulation and contracts. Roads and airports delivered revenues above market expectations,’ he said.

Meany explained that due to being providers of essential services with few competitors, infrastructure companies’ trading volumes were less sensitive to economic conditions and their prices were in many cases linked to inflation. Infrastructure covers a broad range of sub-sectors with different risk and return characteristics, with many areas offering structural growth through the cycle with reduced risk of political intervention.

‘We see a number of opportunities globally following a recent sell off of volume sensitive stocks, which was spurred by growing market concerns about a possibility of a further economic slowdown in the US. We are particularly confident about the outlook for the European toll road sector, which comprises many low risk high quality companies offering investors sustainable dividend yields of around 5%,’ Meany explained.

‘During the 2008 recession, ASF, the main concession of Vinci, an operator of over 4,000 kilometres of motorways across France, reported a rise in revenue of 3% despite a small fall in traffic of 1.4%. Vinci is the biggest holding in the First State Global Listed Infrastructure Fund. Similar results over the period were reported by road operators Abertis in Spain and Atlantia in Italy,’ he added.

In addition, Meany is poised to take advantage of an expected rise in the number of IPOs following the sovereign debt crisis, with inefficient public companies being placed in private hands. Given the scarcity of infrastructure assets, listed companies may also attract M&A premiums from unlisted infrastructure funds and other strategic investors.

‘The sector'’ performance over the past few years has confirmed the relative resilience of global infrastructure companies in different market conditions due to their high barriers to entry, strong pricing power, sustainable growth and predictable cash flows. If markets remain concerned about the economic growth outlook, we will continue to move our portfolio from some of the more expensive defensive sectors towards selected growth opportunities, where our investment process is currently identifying the right mix of value, quality and catalysts,’ he concluded.

The fund is rated ‘A' by both Standard & Poor’s and OBSR and is celebrating its third anniversary in early October.