“It’s our contention – supported by the numbers we’re seeing in our fund and its popularity among both institutional and increasingly, retail investors – that the right kind of global listed infrastructure assets can form a vital part of diversified income generating portfolio,” said Omega Managing Director, George Vassos.

“We’ve applied our strategy specifically to deliver an alternative for investors seeking defensive assets that also generate strong yields and certainty of income, minus the volatility associated with equities.”

Mr Vassos went on to explain that the listed infrastructure assets in the Omega fund have a low correlation with international equities. As such, they provide diversification benefits that may not necessarily apply to all infrastructure assets.

“Our portfolio is tilted to higher yielding securities, which means companies with strong balance sheets,” he said.
“The stable yield and high total return from the Fund is a reflection of the strength and monopolistic nature of the companies. What we mean by this is that they don’t have much competition, which translates into sustainable growth and predictable cash flows,” he explained.

There has been much written about the so-called ‘great rotation’, with investors switching from low yielding fixed income back into equities: but that does not tally with Omega’s experience.

“Since its inception in last September, the Omega Global Listed Infrastructure Fund has grown to over $160 million, moving from $95 to $167 million since March alone. The performance of the Fund has also been very strong, equating to 12.56% since inception.”

Mr Vassos attributed the strong performance of the Fund to the sub-sectors represented within it, including integrated regulated utilities, toll roads, water, transmission & distribution, all of which are defensive in nature and provide stable income streams.

“It’s important to understand that this Fund has been designed in line with Omega’s risk-controlled process,” he said. “Our portfolio construction is subject to tightly managing risk and volatility, and we invest in up to 200 global listed infrastructure assets.”

The fund has a major regional exposure to the US, with major sub-sector exposure to integrated regulated utilities such as The Southern Co, Duke Energy Corp and American Electric Power.

“In Australia, we like toll road companies such as Transurban Group,” said Mr Vassos.

In conclusion, Mr Vassos said that when his team was developing the Fund, they focused on the outcome they wanted and worked backwards.

“Investors were looking for liquid exposure to infrastructure, a low correlation to international equities and a consistent, high and stable income stream,” he said.

“And that’s what the Omega Global Listed Infrastructure Fund offers.”

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FIRPTA is a US tax levied on foreign persons when they dispose of real property interests.

Russell recommends superannuation investors construct broad multi-asset portfolios designed to meet their specific investment objectives. Alternative investments, including direct property and infrastructure, locally and overseas, are important components of this multi-asset approach.

“Russell’s own multi-asset portfolios are continually evolving to take advantage of new investment opportunities as they arise,” said Andrew Sneddon, Managing Director and Portfolio Manager, Multi-Asset Solutions.

“The potential abolition of FIRPTA tax prima facie makes future investments in US real estate more attractive and we are currently looking to enhance our range of multi-asset portfolios with allocations to direct property and infrastructure in the US as well as Europe and Asia,” said Mr Sneddon.

Samantha Steele, Senior Research Analyst, Alternative Investments said, “While Australian institutional investors have long discussed the need to capture global property opportunities, it seems this tax announcement may be the tipping point which will see a more definite move offshore for many funds.

“US direct property and infrastructure provide attractive opportunities for Australian super funds as part of their global real estate / infrastructure portfolios. The increasing scale of Australian funds means they are looking offshore,” said Ms Steele.

In addition to revising its own multi-asset portfolios, Russell recommends funds update their asset allocation models to highlight the increased attractiveness of US direct property and infrastructure relative to other asset classes, if the reforms become law.

Traditionally many super funds have shunned this investment opportunity because the US tax cost is too large. FIRPTA can erode 35-40% of the investment income and is not refundable to the Australian super investor. This is far higher than the maximum 15% tax that Australian super funds face.

In Australia, Russell can advise Australian investors on offshore real estate / alternative investment through its ready access to the global team’s experience and insights, to assess whether and which US property and infrastructure investments are appropriate for its multi-asset portfolios.

Ms Steele said super funds looking for investment opportunities in alternatives should now consider the increased attractiveness of US property and infrastructure in after-tax terms. Equally, super funds that have relegated this asset class to ‘no go’ status for tax reasons should now reconsider.

“Prime real estate in the US has recovered strongly since the global financial crisis and is close to pre-crisis pricing. That said the asset class still looks cheap on a relative basis when compared to historical yield spreads versus treasury and corporate bonds.

“While capital appreciation may be moderating, investors should still be able to achieve 7-9% total returns over the next few years, much of which will be income. Positive tailwinds for the asset class are substantial demand, a dearth of new construction, low interest rates and benign inflation,” Ms Steele said.

In late 2011 Russell released a report highlighting Australian investors were planning to increase their allocation to global non-listed property by as much as 34%. The groundbreaking research was conducted by Russell Investments, the Asian Association for Investors in non-listed Real Estate Vehicles Limited (ANREV) and the Australian Institute of Superannuation Trustees (AIST). Foreign tax drag was highlighted as a key deterrent for 43.6% of investors in the 2011 Survey, with many particularly cautious about the US.

“Australians are savvy property investors, and are clear-eyed about the opportunity to diversify their property holdings and bolster their offshore expertise. However there are still numerous challenges and super funds will need to negotiate this new territory prudently,” Ms Steele concluded.

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Key Findings
Funds which achieve Morningstar Analyst RatingsTM of Gold, Silver, or Bronze are designated Morningstar Medallists.

• We gave two of the eight strategies we assessed the second highest-possible Analyst Rating of Silver – Magellan Infrastructure and RARE Infrastructure Value. A further two were designated Bronze – Colonial First State Global Listed Infrastructure and Vanguard Global Infrastructure. 
• Global listed infrastructure’s inflation-fighting abilities have been touted as one of its primary attractions. There are some valid arguments for believing this view, but they are not foolproof, and empirical evidence gathered from academic research is far from overwhelming. 
• It’s important to not simply allocate to global listed infrastructure on the basis of concerns about inflation. Nonetheless, investors preoccupied by this issue are best-served by choosing a strategy with a very conservative definition of infrastructure.
• Global listed infrastructure has delivered relatively steady dividend yields at the underlying company level that also typically exceed other equities. These yields can change over time, however, and their decline from 2009 – 12 reflect the sector’s rising valuation.
• Importantly, external factors can affect the stability of the actual distribution paid to unitholders. While fund managers have acted to address these issues, investors looking to fulfill a regular income need should be aware of the potential shortcomings.

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Jonathan Baird, Investment Analyst at Zenith said “Given the ongoing fiscal challenges faced by many developed countries and the accelerating level of infrastructure funding required, Zenith expects an increase in the opportunities for meaningful private sector involvement in the development of infrastructure assets. Similar fiscal issues are also leading to the privatisation of state-owned infrastructure assets in stressed countries in Southern Europe.”

“While there is strong rationale to suggest there is a significant pipeline of private investment opportunities it must be acknowledged that not all infrastructure assets are created equally, and not all private participation will occur with a similar risk return profile.”

“The level of regulation and the perceived security that it provides is one of the key consideration for many infrastructure assets,” Baird said.

Performance (over the last 12 months) has been strong, with the S&P/ASX Global Infrastructure Index ($A Hedged) returning over 18% for the 12 months ending 30 September 2012.

Of the eight global funds and one domestic fund that undertook the full due diligence process, three funds achieved the Zenith’s Highly Recommended rating, three funds achieved a Recommended rating and one fund was received an Approved rating.

International Ratings

• RARE Infrastructure Value Fund – Highly Recommended
• RARE Infrastructure Value Fund – Unhedged Highly Recommended
• Magellan Infrastructure Fund Highly – Recommended
• CFS Wholesale Global Listed Infrastructure Securities – Recommended
• Lazard Global Listed Infrastructure Fund – Recommended

Emerging Markets Ratings

• RARE Series Emerging Markets Fund – Recommended

Domestic Markets Ratings

• Goldman Sachs Wholesale Australian Infrastructure Fund  – Approved

Baird, also discussed the inclusion of listed infrastructure funds in client portfolios.

“Infrastructure assets typically provide a long-term reliable income stream, which is resilient to changing economic conditions, and is largely protected from inflation.”

“Zenith believes that over the longer-term, the inclusion of listed infrastructure in an investor’s international equities exposure provides significant diversification benefits, with the potential to improve the risk/return profile of the overall portfolio.”

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“Our increased conviction in management teams has resulted in two upgrades in this year’s review – the RARE Infrastructure Value Fund and Lazard Global Infrastructure Fund were both upgraded to Highly Recommended,” said Andrew Coutts, Senior Investment Analyst.

“This is the first time we have had two Highly Recommended funds in this sector since Lonsec commenced coverage of infrastructure securities funds in 2007.” 

While the sector is still relatively immature, Lonsec has continued to gain conviction over time as managers have shown they can meet objectives over the market cycle while consistently investing to their style.

Sector observations
Listed infrastructure outperforms
With volatility being a dominant theme in global equity markets during 2011, the predictable cash flows, attractive yield profiles and more modest volatility offered by infrastructure securities were qualities that exerted significant pull for investors. 

Over the year to 31 March 2012, both global and domestic infrastructure benchmarks fared considerably better than their broader equities counterparts, a trend which is also observable over the longer term. Despite short-term economic concerns, Lonsec continues to see long-term opportunities for listed infrastructure and believes its inclusion in a portfolio should improve its overall risk return profile.

Australian infrastructure companies feature prominently
Australian companies were popular in most portfolios, despite making up a minor portion of most global infrastructure indices.  

“Australian listed electricity distribution company Spark Infrastructure was the most popular global infrastructure company, appearing in the top 10 holdings of four of the six global infrastructure funds we rated,” commented Coutts.

Other common Australian infrastructure companies appearing in global portfolios included Transurban, DUET Group, Sydney Airport and Asciano.

Emerging Markets Infrastructure
Investment in emerging markets infrastructure can be an effective way to access the growth story of emerging markets, while reducing the risks relative to broader EM equities due to the inherent defensive characteristics of infrastructure assets. However, accessing this growth potential also carries a number of additional risks.

While the peer group of infrastructure funds is relatively small, the managers within the peer group vary significantly in their approach to investment in emerging markets. Despite making up only a portion of portfolios for those with the largest allocation, this can serve as an important point of distinction when selecting an appropriate infrastructure manager.

6 July 2012

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AMP Capital Head of Infrastructure Europe, Boe Pahari said: “The demand for infrastructure investment as governments seek to focus on critical infrastructure and utilities is increasing. As companies within these industries seek to streamline balance sheets and divest assets to fund ongoing development, this provides further opportunities for infrastructure managers to invest in new assets. This environment has heightened awareness of investment opportunities amongst institutional investors looking for stable long term yields with the potential for capital growth.”

AMP Capital is progressing an active deal pipeline within a range of infrastructure sectors including energy/utilities, transport and social infrastructure in the UK and Western Europe which will see SITE, an open-ended fund, target its next close in December this year.

“As we look to further develop our infrastructure business in the UK and Europe, we are pleased to be managing the infrastructure investment allocation of one of the largest pension funds in the UK,” Mr Pahari said.

Merseyside Pension Fund Head of Pensions, Peter Wallach said, “The attractiveness of real and stable assets in an environment with potential inflationary pressures has led us to investment in infrastructure and other real assets which seek to match the dynamics for which the pension fund is looking. AMP Capital’s experienced team provided the approach and focus we were looking for in line with our strategy
of investing in quality infrastructure assets.”

Established in 2005, SITE invests in a portfolio of diversified infrastructure assets in the United Kingdom and Western Europe. Total global infrastructure assets under management held by AMP Capital is US$6 billion. SITE offers access to a diverse range of infrastructure sectors, including energy/utilities, transport and social infrastructure. The Fund currently holds seven investments: Angel Trains, Alpha Trains,
Compania Logistica de Hidrocarburos (CLH), Wales and West Utilities, Kenyeri Hydro, BAA Toggle and Thames Water.

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Andrew Coutts, Investment Analyst responsible for this sector commented, “This is a small and specialised sector with a number of quality managers who each have a number of strengths and competitive advantages.”

“Lonsec has focused on reviewing a select list of higher quality offerings in this review, rather than researching all the products in this space.” 

Investment teams build and there’s increased competition for talent
Since Lonsec began its coverage of the infrastructure securities sector in 2006, investment teams have typically enjoyed a high level of stability relative to managers focused on broader equity strategies. 

“In part this can be attributed to the size and relative immaturity of the infrastructure securities sector, although hiring freezes resulting from the GFC also likely kept movement to a minimum,” observed Coutts.

“In contrast, over the past 12 months we have seen higher team turnover, with several managers in Lonsec’s universe experiencing departures in investment team staff due to competition from other infrastructure securities managers.”

In the past 12 months, the sector has also been a beneficiary of an exodus of talent from specialist listed and unlisted infrastructure manager CP2 (formerly Capital Partners). “RARE and CFS have added to their ranks with quality personnel from CP2,” said Coutts.

“Lonsec has met with each of these hires during the research process (as well as on previous occasions) and observes a consistent message in terms of the level of discipline and depth of research undertaken in the CP2 investment process, which seems to be highly aligned with the bottom up process adopted by other managers within the sector.”

Emerging markets exposure
While most product mandates typically allow managers to invest in emerging market stocks subject to threshold limits, the extent to which this capacity is used is an important point of distinction between the funds rated.

“Most managers agree that there are long-term trends in emerging markets that are favourable for infrastructure; these economies have undergone significant development in recent years, with a combination of economic and demographic trends such as population growth and increased urbanisation expected to lead to increased demand for infrastructure,” said Coutts.

“Managers fall into two camps – those that invest directly in emerging markets and those that don’t believe expected returns compensate for the increased sovereign, political and regulatory risk in such economies.”

Lonsec believes that managers with broader infrastructure mandates and security selection criteria may be more suitable candidates for investors more open to capitalising on the sector’s expected long-term growth across both the developed and emerging markets.

“Those funds with an OECD focus are likely to provide less volatile returns and provide greater defensive qualities in falling markets,” said Coutts.

“In considering non-OECD infrastructure exposure, investors should be aware that they may be gaining meaningful exposure to emerging markets through their broader global equities allocation.”

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Over the past year, strong performance has been rewarded by positive flows despite investors being generally nervous to re-enter other listed markets.

“Growth continues to come from an international trend to private ownership and management of these assets and unsurprisingly, there has been strong growth in emerging markets. Macroeconomic factors have clearly been an important consideration when researching stocks in this sector as companies are affected by sovereign and regulatory risks and some industries are highly correlated to economic growth,” said S&P Fund Services analyst Simone Gavin.

Ms Gavin added: “Performance bounced back significantly following the financial crisis and over the past year listed infrastructure stocks performed more in line with what is expected on an absolute basis (low double-digit returns). It continues to be a relatively immature market given the long-term nature of investments and we believe investors need to have at least a five-year investment horizon.”

In the sector report, we look at the different benchmarks used; the structure of the investment teams and how the manager splits its coverage; and differences in the universes in which each manager invests, by region and sector. Other themes we explore include how macroeconomic input affects positioning and we provide an update on fund flows to these products and the correlation of listed infrastructure with other asset classes.

The 2011 sector review is S&P’s fourth formal review of listed infrastructure. It covers eight managers and 12 listed-infrastructure capabilities—10 global capabilities, one emerging markets infrastructure product, and one domestic fund.

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This comes after Phil Garling, AMP Capital’s current Global Head of Infrastructure, decided to retire from full time executive roles following a career spanning 34 years in financial services and construction.

AMP Capital Managing Director Stephen Dunne said: “I am very pleased to welcome Scott as the new Global Head of Infrastructure.  Scott’s 15 years of direct infrastructure experience will provide a strong basis from which we will continue to expand our global investment opportunities for clients.

“AMP Capital will continue to focus on the attractive opportunities in infrastructure as governments around the world seek to reverse years of under-investment in critical infrastructure and utilities – and converting these into investment opportunities for our clients,” said Mr Dunne.

Mr Davies has over 20 years’ financial services experience and a well-established presence in the global infrastructure space.  He brings a strong record of establishing and growing infrastructure businesses.  He was CEO of the ASX listed Macquarie Communications Infrastructure Group from its inception in 2002, where he was accountable for all aspects of business performance and management.
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Prior to this, Mr Davies held senior investment roles for Macquarie Capital in New York and London between 1995 and 2002, where he was responsible for Macquarie Group’s cross-border asset financing activities with a particular focus on the telecommunications sector.  Mr Davies has also held roles at Hambros Bank in London and Sydney and Minter Ellison in Sydney.  Mr Davies will report to AMP Capital Managing Director Stephen Dunne.
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“Over the nine years Phil has been with AMP Capital he has built our direct infrastructure capability into a world class offer.  Under Phil’s leadership, we expanded the breadth and depth of our infrastructure capability, opening new offices in London, Beijing, New Delhi and New York and he increased the team from seven investment professionals to more than 60 globally,” Mr Dunne said.
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“Phil has formed experienced teams covering the infrastructure life-cycle, from deal origination to asset management and divestment, allowing us to offer leading investment capabilities to clients who want access to infrastructure assets in the United Kingdom and Europe, Australia, Asia and North America.  I personally have enjoyed working with Phil and wish him all the very best for his retirement,” he continued.
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Mr Garling will retain his involvement with AMP Capital via existing board representations, including continuing as its appointee to listed company DUET Group, the Chairman of the Asian Giants Infrastructure Fund (AGIF) and a board member of The Infrastructure Fund of India (TIFOI). Phil Garling will transition his responsibilities to Scott Davies over the coming weeks and will leave AMP Capital in July.

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