Listed infrastructure has long been cast as the overlooked sibling in the infrastructure debate, overshadowed by the glamour of private markets. But as valuations hit compelling lows and the ‘volatility mirage’ persists, Tim Humphreys, co-manager of the IFSL Marlborough Global Essential Infrastructure Fund, assesses whether listed assets could be about to prove the real belle of the ball?
The basic appeal of investing in infrastructure is widely recognised. As the foundation of economies worldwide, this is an asset class that can provide diversification, stability, inflation mitigation and growth.
Beyond this high-level consensus, unfortunately, debate continues to rage. In particular, there’s marked disagreement over whether the infrastructure arena is better accessed through listed or unlisted securities.
To a degree, the dispute risks overlooking an important point. The fact is that both approaches can play a useful role in portfolios. Why quarrel over the choice of vehicle when the asset itself is what really matters?
There’s something to be said, though, for exploring this issue more closely. The potential advantages of listed infrastructure are nowadays routinely underacknowledged, mainly because what might be described as the cult of private assets is increasingly steering the spotlight towards the unlisted side of the divide.
This could represent a costly blind spot, especially at present. In my view, there’s good reason to regard listed infrastructure as the Cinderella of the investment universe.
Why? Right now it’s quietly working away, largely ignored and little appreciated, but over the longer term it could be in a position to dramatically outshine the competition.
This doesn’t mean unlisted infrastructure is the investment equivalent of the Ugly Sisters – far from it. Yet it’s well worth reflecting on why its relatively unfashionable counterpart could turn out to be the more desirable dance partner at the return-seekers’ ball.
The volatility mirage
By their very nature, listed infrastructure assets are subject to live valuation. Much of the cachet attached to the unlisted market stems from insinuations that it’s spared the volatility that arises from this practice.
It’s easy to see how investors might be won over by such an idea, which is regularly used to highlight the supposed superiority of all sorts of private markets. Yet the notion is at best mildly confusing and at worst thoroughly disingenuous.
Think of it this way. imagine we buy two apples and place the first in a 30p “bag for life” from a supermarket and the second in a £13,000 trunk from Louis Vuitton.
Ultimately, any external force that influences the price of apples should impact both equally. The second apple won’t be miraculously spared the consequences simply because it’s safely tucked away in an extravagantly priced piece of designer luggage.
Similarly, anything that affects the economics of infrastructure assets will inevitably do so in all relevant markets, irrespective of whether they’re listed or unlisted. To imply the latter sphere can somehow exist as a kind of volatility-lite or even volatility-free zone is ridiculous, if not dishonest.
My colleagues and I refer to this longstanding narrative as “the volatility mirage”. Others have memorably condemned the tendency towards “volatility laundering”. It’s an argument that flies in the face of reality.
Yet it’s not all bad. Ironically, investors in listed infrastructure now stand to benefit from the phenomenon. Thanks to the volatility mirage, demand for private assets has risen in recent years – leaving listed assets to trade at an attractive “volatility discount”.
Opportunity and optimism
There’s another major dynamic in listed infrastructure’s favour – one that taps into the Cinderella comparison even more conspicuously. It relates to the asset class’s performance.
Over time, historically, global listed infrastructure has frequently delivered greater cashflow growth than global equities. It has also proved more successful in avoiding big drawdowns. But it has notably lagged since the start of the COVID-19 pandemic.
In light of this turnaround, perhaps understandably, listed infrastructure has been rated down. Meanwhile, equities have been rated up.
The result: listed infrastructure now sits at an absolute and relative low in valuation. This could present a tremendous opportunity for both tactical and strategic allocations, not least given the significant likelihood of impressive returns over the long run.
There are further factors at play here. They include the scope for active position sizing and, by extension, portfolio optimisation; the absence of lock-ups and barriers to exit; and the flexibility to tilt allocations in response to macroeconomic twists and turns.
We also shouldn’t forget complementarity. As observed at the outset, listed and unlisted infrastructure alike can enhance sensibly diversified portfolios, with each offering distinct characteristics in terms of liquidity, risk, alpha generation, dispersion of valuations, structure, cost and other key considerations.
Of course, since our fund focuses exclusively on listed infrastructure, you could be forgiven for suspecting my team and I are duty-bound to push an optimism-boosting Cinderella story. Fair enough. Please rest assured, though, that we genuinely see this as anything but a fairytale.
Tim Humphreys is co-manager of the IFSL Marlborough Global Essential Infrastructure Fund.
