Even before the pandemic, the strong tailwinds for infrastructure were evident. For example, to support growth and development across both developed and emerging markets, the OECD had previously estimated global infrastructure investment needs of USD 6.3trn annually until 2030. Indeed, the listed infrastructure space has al-ready been one of the fastest growing global asset classes – with the market value of the listed universe expanding from about USD 400bn in 1995 to about USD 4.2trn currently. This growth has been supported by governments seeking to boost private sector participation. Nordea Asset Management is well placed to continue capitalising on these trends, through Nordea’s Global Listed Infrastructure Strategy, managed by real assets specialist CBRE Clarion Securities. The firm’s dedicated global listed infrastructure investment team, led by Jeremy Anagnos, consists of eight professionals with an average 19 years of industry experience.

Multi-year growth in decarbonisation

Anagnos is bullish on the prospects for listed infrastructure as the world eventually emerges from the pandemic – particularly in the area of decarbonisation. “The clean energy transition should invigorate ageing network assets, as it requires significant investment in the network and electric grid. Annual investments are forecasted to increase by 50% from 2020 to 2030, which will translate into attractive earnings and dividends,” Anagnos notes. “For many infrastructure companies, decarbonisation has become a major theme, particularly for utilities. Many still own old and costly coal-fired power plants, which have the potential to be replaced by increasingly cheaper renewables. Innovation is also driving investment opportunities in battery storage, smart meters and network efficiency.”
Anagnos believes the aforementioned utilities space, which is one of four primary pillars of listed infrastructure (communications, regulated utilities, integrated utilities and transportation), is perhaps the most appealing investment area within infrastructure today. “Traditional regulated utilities, which own the wires and poles, are increasingly becoming integrated – building and owning renewable generation facilities, investing in battery storage technology or home smart meters,” Anagnos says. “These utilities are also investing in the grid. The grid was originally designed to carry power in one direction, but with increased take-up of solar panels on homes, for example, there is the potential for power to flow back into the grid. The grid must be modernised and hardened to enable this. The integrated utilities we are targeting, like the Italian group Enel, are facilitating this transition. Such innovation is critical for society to transition to a cleaner energy future.”
Within the high-profile communications space, Anagnos is particularly bullish on data centres. Data centres – which are witnessing increased demand due to the rapid growth of content and social media – can often be excluded from “pure play” infrastructure indices. However, the CBRE Clarion Securities team’s unconstrained approach seeks to capitalise on all available and appealing infrastructure opportunities. “We do not want to limit ourselves when it comes to investment opportunities in the infrastructure asset class,” Anagnos explains. “We have invested in towers and fibre networks for a long time, but critical to facilitating the movement of data is the data centre itself. While not all data centres have core infrastructure characteristics, we have found a few global names that are a critical part of the entire network and have a long runway for growth – especially as we increasingly work in a virtual environment. The indices often lack consistency when it comes to infrastructure, so data centres can fall into areas like telecommunications or specialty REITs. The largest institutional investors in the world invest in data centres within core infrastructure – a stance we have also taken.”

Trading at a triple discount

Listed infrastructure has a history of downside protection and outperformance when equity market volatility in-creases. However, this was not the case in 2020, with the pandemic challenging certain economically sensitive areas within the space – despite the majority of the essential sectors within infrastructure reporting relatively stable earnings since the onset of Covid-19. For example, airports were the largest laggards, with many companies having to cut dividends in the face of the unprecedented 80-90% declines in traffic volumes. Midstream companies were also impacted by the sharp decline in fuels related to travel, as well as reduced broader economic activity. As a result, the global listed infrastructure space now displays a triple discount:

• Compared to listed equity markets: a 5% discount to global equities, versus a long-term 10% premium. However, Anagnos does not expect performance to be disconnected from the continued robust fundamentals for much longer. “Relative to global equities, global listed infrastructure is near its widest discount since right after the global financial crisis. Resilience of earnings and stability of cash flows have been on display, but the market has been fixated on other areas of the equity market – namely the high-growth tech names,” he says.
• Compared to private markets: “In addition, infrastructure assets in the listed markets are trading at 20% plus discounts to private market values. This gap is supported by a ‘wall’ of private market capital waiting to be invested, which distorts asset valuations,” Anagnos observes. “The M&A potential for listed assets should also not be ignored, as the listed space increasingly appeals to institutional investors – particularly given the discounted valuations and scarce availability of similar assets in private markets.”
• Compared to the bond market: while corporate bond yields have been compressing in recent years, listed infrastructure dividend yields have remained firm. The relative yield spread between global infra-structure and credit is well above its long-term average.

Protection against the reflation trade

In addition, infrastructure has characteristics that should enable the assets to perform well in the longer term. “A little over 80% of the assets the companies in our universe own have explicit or implicit mechanisms to pass inflation on to the end user through tolls or tariffs,” Anagnos explains. “This would offset a lot of the impacts of the accompanying rise in bond yields that one would expect to see if inflation were to pick up.” It is often assumed that listed infrastructure’s strong performance relative to general equities over the last 20 years must have been driven by falling bond yields. However, the strong long-term track record of listed infrastructure has been due to a faster rate of underlying earnings growth versus general equities, and is not due to an expansion in P/E or EV/EBITDA multiples relative to general equities. “This makes us very confident about the outlook for the asset class over the next several years almost irrespective of the path of inflation and bond yields,” Anagnos states.

Infrastructure and sustainability

Finally, Anagnos also expects the listed infrastructure space to be a beneficiary of the strong global investor demand for solutions promoting sustainability. “Listed infrastructure underpins many of the 17 UN Sustainable Development Goals¹ and ESG fund flows are increasingly seeking investments in themes key to the asset class such as decarbonisation and clean water,” Anagnos points out. “Infrastructure companies can generate positive social, environmental and economic impacts – such as contributing to greenhouse gas emissions reduction, revitalising disenfranchised areas and improving access to services.” In this context, it has been decided to remove any Midstream sector exposure in the portfolio. The strategy’s exposure to this sector has been regularly decreasing over the last years from 20% to 4% at the beginning of 2021. Anagnos concludes: “Infrastructure creates the basis of every economy, enabling economic and social development. If you take a step back, there is a certain beauty in such an intricate system.”

¹UN Sustainable Development Goals