Seeking Income? The Case for Listed
Infrastructure Income Funds

20 June 2019
A well-selected portfolio of global infrastructure stocks is becoming an increasingly popular way for investors to gain access to steady, inflation-protected income.

For cautious investors seeking a stable income there are some well-worn paths. Fixed income, real estate investment trusts (REITs) and global equity income are all capable of offering this.

However, one income source that should be not be overlooked when considering suitability for clients is global listed infrastructure. The strongest argument for the asset class is its track record of consistently delivering a higher yield than global equities and 10-year bonds demonstrated in the chart below which shows the RARE Infrastructure’s universe of income paying stocks vs traditional yield sources.

RARE Income Universe vs Traditional Yield Sources
Sources: RARE calculations as of 31 December 2018. RARE Income Universe – Yield Universe, monthly since Dec 1999 MSCI World Forward Dividend Yield, Bloomberg. US Benchmark Bond – 10 Year – Yield, FactSet Research Systems. United Kingdom Benchmark Bond – 10 Year – Yield, FactSet Research Systems. Germany Benchmark Bond–10 Year - Yield, FactSet Research Systems. The Income Universe is the Income Strategy universe as determined from time to time. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or needs of investors.

In constructing this universe, global listed infrastructure manager RARE uses a proprietary universe to select securities that they believe most closely meet their definition of infrastructure. Its Income Universe comprises the largest and most liquid infrastructure companies that generate a sufficient level and quality of dividend yield. The universe predominately includes utility stocks such as water, electricity and gas transmission and distribution companies, as well as high dividend paying infrastructure stocks such as toll roads, airports, and railways.

Compared to the rest of the MSCI AC World Index, most of these companies are characterised by stable revenue due to the essential nature of the services they provide. This means they are less likely to be impacted by economic recessions or booms. Furthermore, population increases and government initiatives to build more infrastructure are more likely to cause such companies to invest in their asset bases, which in turn drives revenue growth.

For those that believe we are in a late stage of the global economic cycle, this could be tactically important. In the U.S., RARE currently sees the constraints of very low unemployment, wage growth and inflation coming through. On this latter point, it is worth remembering that it is common for regulated utilities and user pay businesses to easily raise prices with inflation.

Building a bigger defence

Stable inflation-linked revenue has meant the listed infrastructure sector has also displayed defensive growth characteristics over the past 12 years[1] compared to global equities. For example, the S&P Global Infrastructure Index participates in around 70-75% of the beta of MSCI AC World both in months when markets rise as well as when they fall, providing a level of defensiveness during times of market uncertainty.

These outcomes can, in principle, be enhanced by a specialist manager. When loss aversion is a key driver for clients, portfolios such as the RARE Infrastructure Income Strategy can further limit the impact of economic downturns. This defensive strategy consists predominantly of utility companies that provide predictable income distributions due to stable earnings derived from the underlying asset. Regulation and long-term contracts provide stable cash flow and greater capital stability too.

For investors, this can provide greater visibility for revenues and dividends. Notably, the RARE Income Strategy has seen a 65% upside capture of monthly gains made by the MSCI AC World Index while suffering only 26% of any overall monthly losses of the same index since 2010:

Income Universe Beta to Global Equities (monthly returns, local)
Source: RARE calculations as 31 December 2018. Global Equities – MSCI AC World, Gross, Local, FactSet Research Systems (Index Code – MSCI 892400) since 1 July 1996. RARE Income Universe, Gross, Local, FactSet Research Systems (FactSet Code: CLIENT: Yield Universe) since 1 July 1996. RARE Infrastructure Income Strategy Rep Mandate, Local, since inception 31/10/2010. The Income Universe is the income strategy universe as determined from time to time. There may be differences between the strategy and the RARE infrastructure income Universe including differences in the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance and allocations of the strategy composite may not be indicative of the RARE Income Universe over the same period. For more information on the strategy composite see the composite disclosure in the appendix. Past performance is not a reliable indicator of future results. 

Conclusion

As we approach what we view as the latter stages of this current economic cycle, investors should be alert to managing current market uncertainty, which will lead to greater bouts of volatility. UK investors, in particular, who are tempted to focus on a UK income solution, should be mindful of the country-specific and political risks that this also entails. Investment in globally listed infrastructure can provide investors with global diversification, defensive growth and inflation-linked income.

Overall, we believe our specialised approach in the Legg Mason RARE Global Infrastructure Income Fund can deliver not only a healthy income from infrastructure stocks but also an attractive risk-adjusted return in a globally diversified portfolio.   

  • Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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