The value of infrastructure globally is set to more than double over the next two decades, and Legg Mason believes it will become a key source of income.
Nick Langley, co-chief executive officer of Legg Mason subsidiary RARE Infrastructure, looks at four of the drivers set to power global infrastructure – and the income it can provide to investors – over the long-term.
Market size
The value of infrastructure globally is set to more than double over the next 15-20 years, as governments use private capital to expand or upgrade existing transport and energy networks.
“Infrastructure is now worth $50 trillion (€45.67 trillion), but this should rise to $110 trillion over the next 15 – 20 years. Just to maintain the existing stocks of infrastructure around the world costs $2 trillion – $3 trillion a year, but governments cannot afford such levels of investment, let alone the further cost of expanding and enhancing their infrastructure,” Langley says.
“It means more assets will be made available to private investors, and with more options to choose from, it should help investors generate attractive returns.”
Uncorrelated returns
Infrastructure has a different risk/return profile to other assets, Langley states, providing a true alternative for portfolios, especially as allocations to infrastructure remain below other assets such as equities and bonds.
“Global infrastructure names march to a different beat compared to other equities. If you were to compare listed infrastructure to global equities, you achieve a reasonable level of participation on the upside, but far more protection on the downside, underpinned by secure dividends,” he adds.
While infrastructure and alternatives remain less well represented in portfolios, investors have started to diversify in the past few years. According to statistics issued by the UK Investment Association, the allocation to alternative assets increased from 11% to 13% between 2014/15, consistent with the trend for investors seeking complementary sources of return and income.
Renewable growth
The world is changing, with new sources of clean energy taking more market share and the older, dirtier industries in retreat.
Infrastructure allows investors to benefit from that directly, with some $6 trillion of investment to be made in renewables over the next 20 years, according to current forecasts.
“There will be huge investment into renewables following the agreement by governments around the globe to cut their emissions, and we even think current forecasts for spending are too low given the need to meet the new policy goals,” Langley says.
“That kind of tailwind will provide huge opportunities for investors.”
Attractive yield
With interest rates at rock-bottom in the UK and other developed markets, and yields on government bonds plunging, investors have been left with a stark choice; take more risk to generate income, or accept a lower yield.
Low inflation and the recent Brexit vote have pushed the yield on ten-year gilts to a record low of just 1.09%, while cash pays 1.34% on average currently.
Other more risky assets, such as high yield or emerging market bonds, pay more income, but do not guarantee the return of initial investments. Langley says investors could therefore embrace alternative sources of income, rather than having to move further up the risk-spectrum or forego returns.
©2016 funds europe
