OREANDA-NEWS. As equity markets become more volatile and unpredictable, and fixed income rates sit at or near historical lows, U.S. investors who seek income and growth are facing shrinking possibilities for compelling investments in their home markets.
This has led to increased interest by investors actively seeking alternative options that can provide risk-adjusted returns in the current economic environment. Such return characteristics can be found through investing in global infrastructure.
One of the investment management firms that pioneered this sector, RARE Infrastructure Limited (an affiliate of Legg Mason headquartered in Sydney, Australia) recently entered the U.S. market by launching the RARE Global Infrastructure Value Fund (NASDAQ: RGSVX).
"We launched this fund to meet the very-fast-growing U.S. demand for compelling investments in this key sector," said Richard Elmslie, RARE’s Co-Chief Executive Officer and Co-Chief Investment Officer. “Infrastructure assets can help local communities around the world grow, improve economic competitiveness by generating high productivity, and create jobs. Dedicated allocations to infrastructure in a U.S. retail investor’s portfolio can be solid diversifiers.”
Infrastructure assets are typically physical investments like toll roads, railways, airports, water and electric, and gas transmission and distribution networks that provide services essential for everyday life. Irrespective of whether markets are in boom or bust, people interact with these services every day, as their demand for water, gas and electricity remain relatively constant.
These assets often involve governments as regulatory or funding counter-parties and revenues are either regulated or based on long-term concession agreements. All have in common long economic lives, high capital costs and high barriers to entry.
"Investors can benefit from the attractive income streams many listed infrastructure assets can deliver, alongside benefits of the listed markets such as liquidity and compelling fees," Mr. Elmslie said. "Some infrastructure assets can also offer solid and highly-appealing capital appreciation."
The infrastructure market is expected to grow 124 percent, to $110 trillion by 2030.
‘We see many attractive long-term opportunities in listed infrastructure," Mr. Elmslie explained. "We at RARE believe fundamental value remains strong in many infrastructure subsectors, with favorable operating conditions and predictable cash flows. Many companies have reliable earnings and dividend growth, two attributes investors value in today’s low growth environment."
In the developed markets, investment in existing and aging infrastructure is required to meet future needs, while emerging markets build infrastructure to satisfy their increasing demand. The majority of global infrastructure assets remain within public ownership and are therefore not available to private investors, but with pressure on government fiscal spending increasing, infrastructure assets are transferring into private ownership through unlisted or listed markets. This should expand the universe of investments available in this multi-faceted asset class.
Over the past 10 years institutional investors have increasingly allocated a portion of their portfolio to infrastructure as a separately-defined asset class. This is due to characteristics such as inflation management; predictable earnings; and low correlations to traditional asset classes, such as equities and bonds. There are added benefits of greater liquidity and increased investment opportunities not available in the unlisted markets. And importantly, global listed infrastructure can offer retail investors the potential for income, some growth and diversification.
As a relatively new asset class, indices for infrastructure are fairly rudimentary. This can create opportunity for specialist managers to add value through active management.
"We believe that what sets apart is our deep understanding of and passion for infrastructure assets," Mr. Elmslie said. “That commitment and experience allows for a deep understanding of projects through our diligent research process to potentially identify the most attractive opportunities for our clients.”
Combining RARE’s sector expertise with Legg Mason’s U.S. and global marketing resources should help the new fund reach investors who can benefit from its unique attributes.
"The climate for investors seeking both income and growth is, to say the least, challenged," said Tom Hoops, Executive Vice President of Business Development for Legg Mason. “Fixed income yields are too low to suit most investors, particularly retirees. Equities are increasingly volatile. In these markets, we believe exposure to equities alone is unlikely to deliver the returns many investors want, or perhaps even need, to meet their investment goals. To bridge that gap, investors should - maybe even must - consider expanding the asset classes they invest in.”
"Investors want alternatives that can deliver income, and maybe a little growth too," Mr. Hoops said. "They need products that sit squarely between fixed income and equities. Listed infrastructure has the potential to do all that. It has very low correlations to global markets, plus it can act as an inflation hedge. It can be a solid option."