Infrastructure supports you every minute of every day
Why invest in essential services?
Infrastructure in a diversified portfolio can enhance returns and reduce portfolio risk.
Infrastructure and utility stocks have been around a long time – the oldest listed utility, Consolidated Edison of the US, traces its listing to 1824. Yet it wasn't until the 1990s that the asset class became a viable option for everyday investors.
More than 350 infrastructure and utility companies are listed on global stock markets these days, representing a market cap in excess of US$4 trillion; about three times the value of the Australian stock market. There are sound reasons why people should include stocks providing essential services in a diversified portfolio.
Why infrastructure?
Infrastructure is a distinctive asset class in three ways (where the term infrastructure generally covers infrastructure and utility companies).
Infrastructure has shown to deliver solid and stable earnings irrespective of economic conditions
Infrastructure assets typically face constant demand, limited competition and a stable regulatory environment. Infrastructure is thus well positioned to generate the reliable cash flows and stable earnings growth, no matter what economic conditions prevail.
Infrastructure offers inflation protection
Infrastructure comes with natural or built-in protection against inflation because regulators typically allow these companies to raise their prices to protect their earnings when their costs rise.
Infrastructure has lower risk of capital loss
Assets that have reliable earnings growth and stable income streams are typically havens – sources of stability – in times of market declines.
Including infrastructure in a diversified portfolio can enhance returns and reduce portfolio risk.
Where our strategy is different is that we apply a stricter definition to what qualifies as infrastructure and a utility.
Our investment approach for infrastructure and utilities is founded on two principal objectives: to achieve attractive risk-adjusted returns over the medium to long term and to reduce the risk of permanent capital loss. As a result, we are an absolute-return focused manager that aims to invest in companies at prices that deliver attractive risk-adjusted returns over a three-to five-year period.
What sets our approach apart?
Where our strategy is different is that we apply a stricter definition to what qualifies as infrastructure and a utility. We believe that a key reason why people invest in infrastructure and utilities is that they are seeking the reliable returns that are associated with the asset class. To achieve this objective, we limit our investment universe to stocks that provide investors with predictable, through-the-economic-cycle, inflation-linked returns. This means we exclude stocks whose earnings are sensitive to competition, sovereign risk and changes in commodity prices.
The stocks we consider for the strategy are mainly drawn from two sectors:
Regulated utilities, which includes energy and water utilities. We estimate that utilities comprise about 60% of the potential investment universe for the strategy. Utilities are typically regulated by a government-sponsored entity. Such regulation requires the utility to provide an essential service while efficiently allowing the utility to earn a fair rate of return on the capital it has invested.
Infrastructure, which includes airports, ports, railroads, toll roads, communications assets and energy infrastructure (oil and gas pipelines).
Airports
Rail
Toll Roads
TelCO Towers
Energy
Water
How to invest
Magellan offers two market-leading strategies, global equities and global listed infrastructure. Find out how easy it is to invest in the world’s best companies, as chosen by Magellan’s experts.
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