27 Sep 2020
28/09/2020
The global economy is showing early signs of a recovery and although the outlook remains uncertain, many investors are starting to think about a world beyond COVID-19 – where the outcome of significant fiscal stimulus is the return of inflation. How would listed infrastructure fare against a backdrop of higher bond yields and rising interest-rate expectations?
While the asset class has historically shown a degree of sensitivity to movements in the bond markets in the short term, we expect the long-term effects for our growth-focused strategy to be considerably different. We welcome inflation. We welcome a world of controlled economic growth with gently rising inflation which provides many listed infrastructure companies, whether directly or indirectly, with a vital source of growth. Inflation-linked revenue is a key feature of the asset class and a key driver of the growing cashflows and dividends we seek.
But inflation is not the only source of growth. Listed infrastructure is a beneficiary of long-term structural trends, such as renewable energy, digital connectivity and demographics – powerful themes which we believe will endure for many decades to come.
The exposure to structural growth is most apparent in our ‘evolving’ category of infrastructure which includes communications and transactional infrastructure. The importance of digital infrastructure came to the fore during lockdown as millions of people around the world were forced to work remotely and entertain themselves at home, but there are other long-term themes at play, namely the proliferation of data in our increasingly digital world. Transactional infrastructure continues to benefit from the structural growth in payment networks. The long-term shift away from cash transactions to digital and card payments has not only remained intact during lockdown but may even accelerate due to changes in consumer behaviour.
‘Evolving’ infrastructure’s faster growth and the diversification benefits it can provide is illustrated in the analysis below.
We have stress-tested our investible universe – 250 companies which meet our criteria of physical infrastructure assets, dividend discipline and sustainability – in a scenario of rising interest rates. The analysis shows the effect of a 100 basis point shift in the yield curve (propagated) on investment performance. The biggest impact is at the short end as negative sentiment weighs on the defensive areas of ‘economic’ and ‘social’ infrastructure, while ‘evolving’ infrastructure holds its own – thereby demonstrating its qualities as an effective diversifier. As we look further out, rising rates have a positive impact for perfectly logical reasons: rates go up because economic activity and inflation are on the rise, which means more traffic through toll roads and more passengers at airports, as well as more cashflows from inflation-linked revenues.
The results of this stress-test would look very different for a strategy which is focused on delivering a high yield without prioritising growth. While bond proxies are likely to suffer in an environment of rising rates, our approach is designed to benefit from inflation – because of our resolute focus on long-term growth.
Past performance is not a guide to future performance.
The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment. The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.
Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
Further details of the risks that apply to the fund can be found in the fund's Key Investor Information Document and Prospectus.
The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.