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THE INVESTMENT CASE FOR
LISTED INFRASTRUCTURE
Infrastructure assets represent the backbone of modern economies, encompassing essential services such as energy grids, transportation networks and communication systems. While they may be perceived as mundane, slow-growing investments, they could potentially provide equity-like returns over the long term, at lower risk. With infrastructure assets trading at relatively attractive valuations versus global equities and the industry facing a number of secular tailwinds, we believe it is an opportune time to consider adding the asset class to a diversified portfolio.
Global listed infrastructure is poised to benefit from several long-term growth drivers:
Accelerating growth in electricity demand. The electrification of economies is reshaping energy demand patterns. Electricity demand in the developed world has stagnated over the past two decades but is now poised to reaccelerate over the next decades, as shown on the chart below. This is being driven by surging demand for data processing led by artificial intelligence, the adoption of electric vehicles (EVs) and government incentives to encourage investment in localised manufacturing.
Historic underinvestment in infrastructure. Decades of insufficient investment have left many developed economies with ageing and inefficient infrastructure. In the US, for example, spending on infrastructure has declined from a post-war peak of 2.5% of gross domestic product to around 1% over the past 20 years, well below competitor economies such as China. This has left critical sectors such as transportation and utilities in desperate need of upgrades, creating opportunities for companies to participate in long-overdue modernisation projects.
Shifting supply chains. The Covid-19 pandemic and geopolitical tensions have driven nations to reevaluate their supply chain dependencies. Infrastructure assets such as ports, railroads and storage facilities are key to supporting more resilient and localised supply chains, offering selective opportunities for investors.
Global listed infrastructure offers unique advantages for portfolio construction:
Defensive and growing income streams. Infrastructure assets generate stable, predictable cash flows, often backed by long-term contracts or regulated pricing structures. Many of these cash flows are indexed to inflation, making them particularly valuable in volatile or high-inflation environments. This stability allows infrastructure investments to deliver equity-like returns but with lower volatility, offering a compelling risk-adjusted return profile.
Diversification benefits. Infrastructure assets typically have low correlation with other asset classes such as equities and bonds. This diversification can help reduce overall portfolio risk while enhancing returns over time.
Relatively attractive valuation. Rising bond yields over the past couple of years have forced investors to discount the income streams of infrastructure assets at higher yields, negatively impacting capital values. The upside of this is that it raises future expected returns for investors. With the broad global equity indices trading at elevated valuation levels, the prospective return of infrastructure assets appears favourable relative to the equity market.
Private infrastructure funds looking for targets. Private infrastructure funds have raised large amounts of capital over recent years that need to be deployed. It is estimated that these funds currently have more than US$300 billion in dry powder, and the listed infrastructure funds have become natural targets for some of them. This arguably provides a floor support to listed valuations. There have been a number of transactions over the past two years where a private fund has acquired assets from a listed fund at a sizeable premium to its listed value.
While the long-term outlook for global listed infrastructure is robust, the asset class is not without risks. Infrastructure assets are often subject to government regulation. Policy shifts, such as changes in renewable energy incentives or transportation subsidies, can significantly impact profitability. Specialist managers are well positioned to navigate these complexities by conducting in-depth analysis and engaging with policymakers.
Returns within the infrastructure sector can vary widely by geography and asset type. For example, utilities in Europe may face different challenges and opportunities compared to toll roads in Asia. Active management allows investors to capitalise on these disparities by targeting regions and sectors with the most attractive risk-reward prospects.
Global listed infrastructure represents a unique opportunity for investors seeking to capitalise on structural growth drivers such as rising electricity demand, supply chain shifts and historic underinvestment in infrastructure. The asset class offers compelling portfolio benefits, including stable income, inflation protection and diversification, while its current valuation levels and support from private infrastructure funds further strengthen its investment case.
However, navigating the complexities of this sector requires a specialist approach. At Sanlam Private Wealth, we have shortlisted a number of global infrastructure funds and will look for opportunities to deploy these across our multi-asset portfolios in the coming months.
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Carl Schoeman has spent 22 years in Investment Management.
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