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02 Feb 2018

Why go passive for infrastructure?


In a world in which traditional asset returns are arguably becoming more correlated, it’s harder to find real alternatives. Diversifiers like property and infrastructure have proven complex and costly in the past. Thankfully, some new ETFs are at hand to give you at least some access to their diversification benefits. 


Building better foundations 

After (finally) making substantial progress on two of his three main campaign commitments - tax reforms and deregulation - President Trump’s State of the Union speech belatedly shed a little more light on his infrastructure spending agenda. Detail is still fairly scant but more may follow mid-month when the next budget will be published.


We do know he plans for around $1.5tn to be spent on infrastructure over the next 10 years. However, the federal government may well only commit $200bn of its own funds and will rely on its ability to extract further funding through states, cities and local partnerships and with the private sector. Private companies are more important than ever in helping countries build their infrastructure backbone.

Access to the infrastructure sector has, however, been limited for small investors. Minimum investment tends to be high – from tens of thousands to millions, making it difficult to buy a diversified portfolio. It can be costly to buy and maintain these projects – stamp duty on property can add up to 15% of purchase costs. And realising cash can be time consuming and costly. The good news – recently it has become increasingly possible for investors to gain some access to the companies that lead the asset class via passive investing, in particular ETFs.


Listed infrastructure

During this time infrastructure has moved from being primarily an unlisted asset class to a listed one that is available to all investors. This is because the public companies that are focused on infrastructure work can be traded on exchange. 

Unlike the unlisted real assets, listed infrastructure assets will trade like equities, so they have a more volatile risk profile. That’s the trade-off you have to be willing to make. There are however few broad infrastructure ETFs available to European investors. Those that are available tend to follow global indices. Ours are different in that they focus solely on individual regions: one on the US, the other on Europe – so if you have a view on which area is likely to see greater infrastructure spending in the next few years, you can pinpoint your allocation accordingly. 

Tracking FTSE’s Core Infrastructure indices, our ETFs give exposure to US or European companies deriving at least 65% of their revenue from transport, telecoms or energy projects. This focus on the core infrastructure activities means they tend to be more defensive than broader infrastructure exposures, which can help reduce drawdowns at time of stress.  They also tend to offer higher-than-average dividend yields, more stable revenues and cash flows, and less sensitivity to short-term economic cycles. 

The methodology meanwhile helps them avoid the fault that has historically plagued many other infrastructure indices – overexposure to utilities firms. Our ETFs cap their utilities exposure at 50% of assets, ensuring a good level of diversification. 

Prospects look strong as infrastructure ages in markets like the US and Germany, and it’s fair to assume infrastructure assets will expand over the coming years given the spending promises made over the Atlantic and much closer to home. Gaining an exposure now could be a good idea. It may help reduce correlations, and potentially give your investment income a much needed boost. Furthermore, because infrastructure returns are often linked to inflation, the asset class can act a hedge against inflation.


Listed infrastructure chart

Source:Lyxor/Bloomberg, FTSE Russell Data period Jan 2012 to Dec 2016. Past performance is not a reliable indicator of future results.

Real Estate Investment Trusts

While listed infrastructure ETFs are relatively new to the game, real estate investment trusts are not. REITs allow smaller investors to own a portion of a portfolio of income-producing property ventures. Like infrastructure equity, REITs can be correlated to equity markets in the short run, but in the long term their returns should provide more diversification. And investing through a passive vehicle, like an ETF, allows investors to split their investment across a variety of REITs. 

US rate hikes may not, on the face of it, be good for REITs. They could however signal a stronger economy – and property markets could be long-term beneficiaries. REITs investors may enjoy capital appreciation, generate above-average income, and protect themselves against inflation.

Risk Warning 

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