Institutional interest in the sector is extremely strong and for good reason. Two infrastructure corporations held by our funds have recently completed asset sales to institutional investors at premium valuations. The Canada Pension Plan Investment Board (CPPIB) and two Australian superannuation funds purchased a stake in a set of Washington, D.C. area toll roads from our Australian holding Transurban. Italian utility Enel Group (another holding) was able to sell its stake in a fibre network to Macquarie Group.
Private valuations are at a significant premium to public markets, reflecting expectations of long-term cash flow. We expect that rising public share prices will close the gap between public and private, rather than institutional interest abating.
Across asset classes, infrastructure stands out as reasonably valued for meeting long-term investor needs. A recent global survey of pension funds1 found infrastructure was the second most favoured asset class (out of 25) due to its ability to provide inflation protection and income. With government (and some corporate) bond yields at all-time lows, and equities at or near all-time highs, infrastructure offers an excellent bargain as a middle ground. While the S&P 500 Index is more than ~12% above its pre-COVID-19 high, infrastructure remains 15% below its pre-COVID-19 high. Given this value dislocation, we see opportunities for capital gains as long-term value becomes recognized, and with an attractive yield, investors are being paid to wait.
1 Source: Creating resilient pension portfolios post COIVD-19, Amundi Asset Management
2 Source: Bloomberg Finance L.P., February 20 to December 22, 2020. S&P Global Infrastructure Index DCR
Tailwinds and headwinds
Sector-specific headwinds should abate in 2021, but tailwinds could continue. 2020 saw earnings fall in many areas (weakness within energy, sharp declines for locked-down toll roads and airports, etc.), but remained steady or grew within utilities and telecom infrastructure. We believe that revenues in cyclical sectors will recover somewhat in 2021 and should so do without any letup in the positive trends for utilities (ongoing investment in renewables) and telecommunications (the inexorable growth of data).
Long-term assets, resilient performance
History speaks to the resilience of this asset class. Since 2003, the S&P Global Infrastructure Index has never seen two consecutive years of negative returns, and each negative year has been followed by a year of double-digit returns. As of this writing, the index is down approximately 8.5% year-to-date, while Signature Global Infrastructure Fund (Class F) has outperformed the index by 797 basis points (as of December 22, 2020).
3 Source: Morningstar Research Inc., as of December 22, 2020. Returns based on S&P Global Infrastructure Index USD.
Positioning and opportunities
Restrained valuation for companies with cyclical and long-term growth leaves us feeling that the sector has an abundance of opportunities. Particular focus is on long-term growth in data and the opportunity for utilities – particularly European – to benefit from government financing for greener energy. We also see an opportunity for North American midstream rerate with a pivot to greater shareholder returns. Given the sectoral backdrop and company-specific opportunities, we are fully invested with very low cash levels. Against this opportunity set, we see risks of interest rate policy, political developments, and the impact that COVID-19 lockdowns and vaccine rollouts could have on airport and toll road operators. With a backdrop of ongoing investor interest, reasonable valuations, and strength from cyclical and long-term factors, we feel confident in the forward-looking case for infrastructure.