October 2012

Global listed securities offer institutional investors attractive yield and inflation-protection characteristics.

Increasingly, investors are responding to todays protracted low-yield environment by searching for new sources of yield. For many, their search has led them to infrastructure, a highly attractive asset class that offers relatively stable cash flows, inflation protection and higher, more sustainable dividend yields.

Global listed infrastructure fills the gap in a real assets portfolio between natural resources, which provide exposure to those companies that pull raw goods out of the ground, and global real estate investment trusts (REITs), which facilitate the sale or use of those raw goods in their finished format. The inability of cash-strapped governments in developed countries to fund badly needed infrastructure upgrades creates an opportunity for private companies. The Northern Trust Capital Market Assumptions (CMA) working group recently noted that even holding current valuation levels steady, infrastructure investments during the next five years have an expected 5% cash flow growth estimate and a 4% dividend yield, which would provide a 9% total return. (Download the CMA working groups complete five-year outlook.)

As explained in a new Northern Trust paper, investors can gain exposure to the asset class through direct investment in unlisted securities or through publicly traded listed securities. Historically, investors interested in adding infrastructure to their portfolios have invested directly in unlisted infrastructure securities. However, investors are increasingly attracted to global listed infrastructure investments for several reasons, including an expanding universe of investment managers entering the listed infrastructure space, as well as greater liquidity, greater diversification and lower fees relative to a direct investment in infrastructure.

Additional Benefits

Investors seeking an alternative to real assets may want to look at global listed infrastructure because it shares many of the same characteristics as real estate, including stability of cash flows, high dividend yield and inflation protection characteristics. Moreover, listed infrastructure investments typically trade at different multiples than REITs and often exhibit lower volatility, offering a compelling alternative when REIT valuations are not attractive.

The listed infrastructure market is broken out into three categories: pure-play, core and broad segments. Pure-play investments exhibit some of the key fundamental characteristics of the asset class, such as high barriers to entry, relatively inelastic demand, and operating concessions and yields backed by longer-dated contracts. Pure-play listed infrastructure assets have relatively low valuation risk, as supply/demand and long run market pricing is largely irrelevant due to the regulated monopolistic nature of the asset class. It is the pure-play segment that most investors typically target when considering an infrastructure allocation.

Active vs. Passive Management

Despite its many benefits, infrastructure remains a highly inefficient asset class. Moreover, the definition of infrastructure is not universally agreed upon and continues to evolve. As that definition expands, we believe the range of investable assets also will broaden.

With such a young and shifting asset class, the Northern Trust paper Gaining Exposure to Infrastructure notes that an actively managed strategy could add a significant amount of alpha producing a purer exposure to infrastructure than published indexes as managers eliminate companies with a small percentage of operating cash flows derived from ownership or operation of infrastructure assets.

To learn more about how listed infrastructure investing may make sense for your portfolio, read the Gaining Exposure to Infrastructure paper.