spotting an investment trend before it happens - AMP Capital
insightpaper
SPOTTING AN INVESTMENT TREND BEFORE IT HAPPENS Why global listed infrastructure is set to become an asset class in its own right
MAY 2015 TIM HUMPHREYS BEng (Hons) Head of Global Listed Infrastructure
We often get asked whether global listed infrastructure is an asset class that should have its own discrete allocation within a portfolio. As the popularity of investing in listed infrastructure has risen over recent years, and new factors are set to drive demand even further, we believe that it is inevitable that it will be recognised as its own unique asset class. We believe that the question investors need to ask themselves is whether they are comfortable waiting for this to happen - or do they want to invest now and benefit from the factors that have the potential to drive strong performance for global listed infrastructure in the coming years?
ABOUT THE AUTHOR Tim Humphreys is the head of AMP Capital’s Global Listed Infrastructure Team, based in the Sydney office. He also leads the research effort of infrastructure companies in the Americas. Tim has over 15 years experience in the financial industry in the UK and Australia and is a skilled infrastructure analyst. Tim holds a Bachelor of Engineering with Honours from the University of Sheffield.
THE INVESTOR OF TODAY DOES NOT PROFIT FROM YESTERDAY’S GROWTH One of the most fruitful ways to make serious money from investing is to spot a hidden gem - an investment or trend that’s not yet widely recognised by the market. Global listed infrastructure has only been used as a discrete investment for less than ten years and, in our view, is at a similar juncture to where real estate investment trusts (REITs) were in the 1980s. It’s very likely that in the 1980s investors were grappling with a similar issue about REITs as they now face with global listed infrastructure – would investing in listed property companies really catch on? And would the REIT market become an asset class in its own right? However, several decades into the growth of this market, most investors would now agree that REITs are indeed an asset class of their own and, most importantly, if you had waited until they had been widely accepted as having this status, you would have missed out on a huge investment opportunity.
Growth of US REITs universe 15,000
12,500
10,000
7,500
5,000
2,500
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: US REITs measured by FTSE NAREIT US Real Estate TR USD from 31/12/1971 to 31/12/2014.
GLI Managers 3% GREITS Managers 30%
2,500
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Will global listed infrastructure follow a similar trend to global REITs? GLI Managers 3% GREITS Managers 30%
$2.6tn GLI universe
15,000
12,500
Approximately 3% of the global listed infrastructure universe is owned by dedicated global listed infrastructure fund managers, whereas 30% of global REITs are owned by dedicated REIT managers.
$1.5tn GREITS universe
10,000
7,500
Source: AMP Capital, Bloomberg, Consilia Capital. Data as at 31 December 2014. 5,000
DEMAND FOR INFRASTRUCTURE 2,500 ASSETS IS SET TO RISE 3,000
A LIQUID WAY TO PLAY A VERY ILLIQUID ASSET CLASS
Unlisted infrastructure - Dry powder
There is widespread recognition Unlisted infrastructure from - Unrealized value When looking at global listed infrastructure, 2,500 Listed - Mkt institutional investors that1983 direct the size the market is already around 1971 1974 1977 infrastructure 1980 1986cap1989 1992 1995 1998of 2001 2004 2007 2010 2013 infrastructure provides attractive investment US$2.6 trillion2, and growing fast. The size 2,000 characteristics - stable cash flow, high of the market can provide investors with a yields, performance which is uncorrelated to very liquid way to gain exposure to what is 1,500 gross domestic product (GDP) and inflation otherwise a very illiquid asset class. Indeed, GLI Managers 3% protection to name but a few. Indeed, it’s quite possible that a large portfolio of 1,000 over the past ten years or so there’s been a GREITS several hundreds of millions of dollars can Managers surge in demand for infrastructure assets be30% fully invested within a few days. 500 investors such as pension funds and from By investing in a portfolio of large, liquid sovereign wealth funds. The total amount stocks, investors can benefit from immediate $2.6tn 0 of infrastructure assets held by these exposure to$1.5tn some2009 of the best2010 infrastructure 2004 2008 2011 types of investors has2005 risen around 2007 GLI from2006 companies worldwide in a diverse set of GREITS US$160 billion in 2010 to approximately universe sectors and regions, thereby replicating a universe US$300 billion as at September 20141. portfolio of direct infrastructure assets, in a Despite this, we expect that demand will liquid, listed environment. continue to rise – in fact, Preqin estimates that some US$101 billion remains in committed and undrawn capital – a number that’s increased by 45% since 2010!
The attraction of an immediate exposure to diverse and high quality assets is becoming more widely recognised by investors particularly those who make up the US$105 billion of committed but undrawn capital in the direct infrastructure space. What we are seeing is that more and more investors are looking to global listed infrastructure as a way to gain liquid exposure to infrastructure, whilst they wait for their capital to be called. For example, the Future Fund, which is Australia’s A$109 billion3 2012 2013 portfolio, 2014did not have an sovereign wealth allocation to listed infrastructure initially. However, it now has 32% of its entire infrastructure portfolio in the listed space4. It’s highly likely that other investors around the world may follow suit and look to invest an increased proportion of their portfolio in listed infrastructure over the next few years.
Global listed infrastructure has grown in popularity compared to direct infrastructure 3,000
Unlisted infrastructure - Dry powder Unlisted infrastructure - Unrealized value
2,500
Listed infrastructure - Mkt cap
2,000
1,500
1,000
500
0 2004
2005
2006
2007
Source: AMP Capital, Preqin, Bloomberg. Data as of 31 December 2014.
2
2008
2009
2010
2011
2012
2013
2014
How does listed and direct infrastructure differ? Listed
Direct
Geographic diversity
Very high
Low
Asset diversity
Very high
Low
Liquidity
Very high
Low
Daily valuations Control Volatility of valuation Transaction cost Portfolio turnover Investment horizon
AN AGEING DEMOGRAPHIC SHOULD ALSO UNDERPIN DEMAND Another trend which is likely to underpin rising demand for global listed infrastructure is the ageing demographic globally. The World Health Organisation forecasts the proportion of the world’s population over 60 years will double from about 11% to 22% between 2000 and 20505. This trend will not only lead to an increase in the number of people in retirement but also an increase in the number of years they spend in retirement. In light of this, we believe that pension funds will need to increase their allocation to liquid assets in order to meet their liabilities as they fall due. As more and more pension funds enter their draw-down phase, we believe they will be forced to sell illiquid assets and buy defensive liquid assets such as listed infrastructure. By selling direct infrastructure assets and investing part of the proceeds into listed infrastructure, this should provide a similar asset exposure along with an immediate supply of capital when needed.
Yes
No
Low
Low to very high
High
Low
Low
High
High
Low
Medium term (5 years)
Long term (10 years)
INVESTORS ARE ALLOCATING AWAY FROM EQUITIES AND FIXED INCOME It’s not just direct infrastructure investors who are allocating to listed infrastructure. We are also seeing investors who have a large allocation to global equities use listed infrastructure as a means to ‘de-risk’ their equity exposure. Indeed, global listed infrastructure has historically demonstrated a low correlation to global equities in down markets. The following chart shows that an index of ‘Core and Pure’ listed infrastructure stocks has enjoyed 93% of the upside of global equities, but only 57% of the downside.
As an example of this usage, BUSSQ, a A$3 billion Australian industry super fund, has allocated 12.3% of its international equity portfolio into global listed infrastructure6. In addition, we are also seeing investors who have large low-returning holdings in fixed income looking to global listed infrastructure as a way to enter equities in a relatively safe and defensive way. Many of these investors are seeking attractive returns uncorrelated to global GDP, so global listed infrastructure is an obvious place to look to invest.
A relatively low correlation to global equities in down markets 10%
100%
MSCI - average monthly return DJBII - average monthly return
93%
% capture 5%
3.3%
3.1%
75%
57% 50%
0%
-1.9% -5%
25%
-3.4%
0%
-10% Down months
Up months
Source: AMP Capital, Bloomberg, Dow Jones, MSCI World. Data from 31 December 2002 to 31 December 2014.
Only
0.9% overlap
between MSCI World and DJBGI 3
GLOBAL LISTED INFRASTRUCTURE IN THE CONTEXT OF GLOBAL EQUITIES There is a minimal overlap between global listed infrastructure and the broader global equities universe. As the below chart shows, the size of the Dow Jones Brookfield Global Infrastructure Index (DJBGII) is more concentrated than the MSCI World Index. The DJBGII is only 2.4% of MSCI World in terms of market cap! Additionally, there is only a 0.9% overlap of constituents between the two indices. This lack of overlap is one of the reasons why ‘Core and Pure’ listed infrastructure tends to have a lower correlation to global equities. Analysis of infrastructure securities requires a different valuation approach and skill set in comparison to broader equities. A vast majority of global equity investors use spot valuation multiples (PE, EV/EBITDA, Yield) across their entire portfolio. However, we 10% believe MSCI that long-term cash flow analysis is the 100% only way to value - average monthly return 93% DJBII - average monthly return infrastructure assets. This is because long term cash flow analysis % capture is5%the only way to capture the value of growth projects that can 75% 3.3% 3.1% take many years to build. Spot multiples by their nature do not capture growth57% several years out, and they can penalise companies 50% 0% who are investing today but have future growth locked in through -1.9% contracts or regulation. 25% -5% -3.4%
FINAL THOUGHTS Currently, the average dedicated allocation to listed infrastructure from pension funds and sovereign wealth funds around the world is very close to 0%. However, we are beginning to see an increasing amount of investors starting to make discrete allocations to the asset class. As allocations rise, then we expect to see significant amounts of new capital enter the space. What this means is that at some point in the next few years we believe it’s inevitable that global listed infrastructure will be recognised as its own unique asset class. The question investors need to ask themselves, however, is whether they want to invest now and benefit from the expected growth in the asset class – or do they want to wait for the investment trend to be increasingly recognised? AMP Capital has recently completed a white paper entitled The greatest investment theme of our lives? In this paper, we discuss the attributes of the asset class, focussing mainly on the cash generated by the underlying assets, and how this can provide investors with stable, reliable and growing income. To obtain a copy of this white paper, please contact AMP Capital via our website: www.ampcapital.com.
As mentioned previously, only 3% of the global listed infrastructure 0% universe is currently owned by dedicated global listed infrastructure Down months Up months managers. This represents a huge opportunity for listed infrastructure specialists to provide value through active management!
-10%
Only
0.9% overlap
between MSCI World and DJBGI
-10%
$40.2tn market cap
MSCI World
$0.96tn market cap
DJBGI
Source: AMP Capital, MSCI World, Dow Jones as at 31 December 2014
References: 1. 2. 3. 4. 5. 6.
Preqin, April 2015, Preqin Quarterly Update: Infrastructure, Q1 2015 AMP Capital Universe. Source Bloomberg, AMP Capital as at 31 December 2014 As at 31 December 2014 Future Fund, 2014. Future Fund 2013/2014 Annual Report World Health Organisation, 2014. Facts about ageing. BUSSQ, 2014. BUSSQ Annual Report 2013/2014
CONTACT US If you would like to know more about how AMP Capital can help you, please visit www.ampcapital.com For your local contact, please visit ampcapital.com/contact or email [email protected] Important notice: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital. © Copyright 2014 AMP Capital Investors Limited. All rights reserved.
SPOTTING AN INVESTMENT TREND BEFORE IT HAPPENS Why global listed infrastructure is set to become an asset class in its own right
MAY 2015 TIM HUMPHREYS BEng (Hons) Head of Global Listed Infrastructure
We often get asked whether global listed infrastructure is an asset class that should have its own discrete allocation within a portfolio. As the popularity of investing in listed infrastructure has risen over recent years, and new factors are set to drive demand even further, we believe that it is inevitable that it will be recognised as its own unique asset class. We believe that the question investors need to ask themselves is whether they are comfortable waiting for this to happen - or do they want to invest now and benefit from the factors that have the potential to drive strong performance for global listed infrastructure in the coming years?
ABOUT THE AUTHOR Tim Humphreys is the head of AMP Capital’s Global Listed Infrastructure Team, based in the Sydney office. He also leads the research effort of infrastructure companies in the Americas. Tim has over 15 years experience in the financial industry in the UK and Australia and is a skilled infrastructure analyst. Tim holds a Bachelor of Engineering with Honours from the University of Sheffield.
THE INVESTOR OF TODAY DOES NOT PROFIT FROM YESTERDAY’S GROWTH One of the most fruitful ways to make serious money from investing is to spot a hidden gem - an investment or trend that’s not yet widely recognised by the market. Global listed infrastructure has only been used as a discrete investment for less than ten years and, in our view, is at a similar juncture to where real estate investment trusts (REITs) were in the 1980s. It’s very likely that in the 1980s investors were grappling with a similar issue about REITs as they now face with global listed infrastructure – would investing in listed property companies really catch on? And would the REIT market become an asset class in its own right? However, several decades into the growth of this market, most investors would now agree that REITs are indeed an asset class of their own and, most importantly, if you had waited until they had been widely accepted as having this status, you would have missed out on a huge investment opportunity.
Growth of US REITs universe 15,000
12,500
10,000
7,500
5,000
2,500
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: US REITs measured by FTSE NAREIT US Real Estate TR USD from 31/12/1971 to 31/12/2014.
GLI Managers 3% GREITS Managers 30%
2,500
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Will global listed infrastructure follow a similar trend to global REITs? GLI Managers 3% GREITS Managers 30%
$2.6tn GLI universe
15,000
12,500
Approximately 3% of the global listed infrastructure universe is owned by dedicated global listed infrastructure fund managers, whereas 30% of global REITs are owned by dedicated REIT managers.
$1.5tn GREITS universe
10,000
7,500
Source: AMP Capital, Bloomberg, Consilia Capital. Data as at 31 December 2014. 5,000
DEMAND FOR INFRASTRUCTURE 2,500 ASSETS IS SET TO RISE 3,000
A LIQUID WAY TO PLAY A VERY ILLIQUID ASSET CLASS
Unlisted infrastructure - Dry powder
There is widespread recognition Unlisted infrastructure from - Unrealized value When looking at global listed infrastructure, 2,500 Listed - Mkt institutional investors that1983 direct the size the market is already around 1971 1974 1977 infrastructure 1980 1986cap1989 1992 1995 1998of 2001 2004 2007 2010 2013 infrastructure provides attractive investment US$2.6 trillion2, and growing fast. The size 2,000 characteristics - stable cash flow, high of the market can provide investors with a yields, performance which is uncorrelated to very liquid way to gain exposure to what is 1,500 gross domestic product (GDP) and inflation otherwise a very illiquid asset class. Indeed, GLI Managers 3% protection to name but a few. Indeed, it’s quite possible that a large portfolio of 1,000 over the past ten years or so there’s been a GREITS several hundreds of millions of dollars can Managers surge in demand for infrastructure assets be30% fully invested within a few days. 500 investors such as pension funds and from By investing in a portfolio of large, liquid sovereign wealth funds. The total amount stocks, investors can benefit from immediate $2.6tn 0 of infrastructure assets held by these exposure to$1.5tn some2009 of the best2010 infrastructure 2004 2008 2011 types of investors has2005 risen around 2007 GLI from2006 companies worldwide in a diverse set of GREITS US$160 billion in 2010 to approximately universe sectors and regions, thereby replicating a universe US$300 billion as at September 20141. portfolio of direct infrastructure assets, in a Despite this, we expect that demand will liquid, listed environment. continue to rise – in fact, Preqin estimates that some US$101 billion remains in committed and undrawn capital – a number that’s increased by 45% since 2010!
The attraction of an immediate exposure to diverse and high quality assets is becoming more widely recognised by investors particularly those who make up the US$105 billion of committed but undrawn capital in the direct infrastructure space. What we are seeing is that more and more investors are looking to global listed infrastructure as a way to gain liquid exposure to infrastructure, whilst they wait for their capital to be called. For example, the Future Fund, which is Australia’s A$109 billion3 2012 2013 portfolio, 2014did not have an sovereign wealth allocation to listed infrastructure initially. However, it now has 32% of its entire infrastructure portfolio in the listed space4. It’s highly likely that other investors around the world may follow suit and look to invest an increased proportion of their portfolio in listed infrastructure over the next few years.
Global listed infrastructure has grown in popularity compared to direct infrastructure 3,000
Unlisted infrastructure - Dry powder Unlisted infrastructure - Unrealized value
2,500
Listed infrastructure - Mkt cap
2,000
1,500
1,000
500
0 2004
2005
2006
2007
Source: AMP Capital, Preqin, Bloomberg. Data as of 31 December 2014.
2
2008
2009
2010
2011
2012
2013
2014
How does listed and direct infrastructure differ? Listed
Direct
Geographic diversity
Very high
Low
Asset diversity
Very high
Low
Liquidity
Very high
Low
Daily valuations Control Volatility of valuation Transaction cost Portfolio turnover Investment horizon
AN AGEING DEMOGRAPHIC SHOULD ALSO UNDERPIN DEMAND Another trend which is likely to underpin rising demand for global listed infrastructure is the ageing demographic globally. The World Health Organisation forecasts the proportion of the world’s population over 60 years will double from about 11% to 22% between 2000 and 20505. This trend will not only lead to an increase in the number of people in retirement but also an increase in the number of years they spend in retirement. In light of this, we believe that pension funds will need to increase their allocation to liquid assets in order to meet their liabilities as they fall due. As more and more pension funds enter their draw-down phase, we believe they will be forced to sell illiquid assets and buy defensive liquid assets such as listed infrastructure. By selling direct infrastructure assets and investing part of the proceeds into listed infrastructure, this should provide a similar asset exposure along with an immediate supply of capital when needed.
Yes
No
Low
Low to very high
High
Low
Low
High
High
Low
Medium term (5 years)
Long term (10 years)
INVESTORS ARE ALLOCATING AWAY FROM EQUITIES AND FIXED INCOME It’s not just direct infrastructure investors who are allocating to listed infrastructure. We are also seeing investors who have a large allocation to global equities use listed infrastructure as a means to ‘de-risk’ their equity exposure. Indeed, global listed infrastructure has historically demonstrated a low correlation to global equities in down markets. The following chart shows that an index of ‘Core and Pure’ listed infrastructure stocks has enjoyed 93% of the upside of global equities, but only 57% of the downside.
As an example of this usage, BUSSQ, a A$3 billion Australian industry super fund, has allocated 12.3% of its international equity portfolio into global listed infrastructure6. In addition, we are also seeing investors who have large low-returning holdings in fixed income looking to global listed infrastructure as a way to enter equities in a relatively safe and defensive way. Many of these investors are seeking attractive returns uncorrelated to global GDP, so global listed infrastructure is an obvious place to look to invest.
A relatively low correlation to global equities in down markets 10%
100%
MSCI - average monthly return DJBII - average monthly return
93%
% capture 5%
3.3%
3.1%
75%
57% 50%
0%
-1.9% -5%
25%
-3.4%
0%
-10% Down months
Up months
Source: AMP Capital, Bloomberg, Dow Jones, MSCI World. Data from 31 December 2002 to 31 December 2014.
Only
0.9% overlap
between MSCI World and DJBGI 3
GLOBAL LISTED INFRASTRUCTURE IN THE CONTEXT OF GLOBAL EQUITIES There is a minimal overlap between global listed infrastructure and the broader global equities universe. As the below chart shows, the size of the Dow Jones Brookfield Global Infrastructure Index (DJBGII) is more concentrated than the MSCI World Index. The DJBGII is only 2.4% of MSCI World in terms of market cap! Additionally, there is only a 0.9% overlap of constituents between the two indices. This lack of overlap is one of the reasons why ‘Core and Pure’ listed infrastructure tends to have a lower correlation to global equities. Analysis of infrastructure securities requires a different valuation approach and skill set in comparison to broader equities. A vast majority of global equity investors use spot valuation multiples (PE, EV/EBITDA, Yield) across their entire portfolio. However, we 10% believe MSCI that long-term cash flow analysis is the 100% only way to value - average monthly return 93% DJBII - average monthly return infrastructure assets. This is because long term cash flow analysis % capture is5%the only way to capture the value of growth projects that can 75% 3.3% 3.1% take many years to build. Spot multiples by their nature do not capture growth57% several years out, and they can penalise companies 50% 0% who are investing today but have future growth locked in through -1.9% contracts or regulation. 25% -5% -3.4%
FINAL THOUGHTS Currently, the average dedicated allocation to listed infrastructure from pension funds and sovereign wealth funds around the world is very close to 0%. However, we are beginning to see an increasing amount of investors starting to make discrete allocations to the asset class. As allocations rise, then we expect to see significant amounts of new capital enter the space. What this means is that at some point in the next few years we believe it’s inevitable that global listed infrastructure will be recognised as its own unique asset class. The question investors need to ask themselves, however, is whether they want to invest now and benefit from the expected growth in the asset class – or do they want to wait for the investment trend to be increasingly recognised? AMP Capital has recently completed a white paper entitled The greatest investment theme of our lives? In this paper, we discuss the attributes of the asset class, focussing mainly on the cash generated by the underlying assets, and how this can provide investors with stable, reliable and growing income. To obtain a copy of this white paper, please contact AMP Capital via our website: www.ampcapital.com.
As mentioned previously, only 3% of the global listed infrastructure 0% universe is currently owned by dedicated global listed infrastructure Down months Up months managers. This represents a huge opportunity for listed infrastructure specialists to provide value through active management!
-10%
Only
0.9% overlap
between MSCI World and DJBGI
-10%
$40.2tn market cap
MSCI World
$0.96tn market cap
DJBGI
Source: AMP Capital, MSCI World, Dow Jones as at 31 December 2014
References: 1. 2. 3. 4. 5. 6.
Preqin, April 2015, Preqin Quarterly Update: Infrastructure, Q1 2015 AMP Capital Universe. Source Bloomberg, AMP Capital as at 31 December 2014 As at 31 December 2014 Future Fund, 2014. Future Fund 2013/2014 Annual Report World Health Organisation, 2014. Facts about ageing. BUSSQ, 2014. BUSSQ Annual Report 2013/2014
CONTACT US If you would like to know more about how AMP Capital can help you, please visit www.ampcapital.com For your local contact, please visit ampcapital.com/contact or email [email protected] Important notice: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital. © Copyright 2014 AMP Capital Investors Limited. All rights reserved.
