Listed infrastructure securities such as utilities have benefited in the past few years as investors have bought stocks which have high yields because they offer a better alternative than historically low-yielding bonds.
The expectation that quantitative easing will be withdrawn in the US, followed by a rise in interest rates, is expected to push bond yields higher, potentially drawing back investors who moved into ‘bond proxy’ infrastructure equities.
In an update last week, the team behind the £818m First State Global Listed Infrastructure fund said while “rising bond yields may act as a headwind for utilities, energy pipelines and mobile towers”, an improving global economy would boost the rest of the sector.
The fund, co-managed by Peter Meany and Andrew Greenup, delivered a return of 4.4 per cent in August as the sector rallied due to expectations that the US would push back its tapering programme.
The sector has been more volatile so far in November as better-than-expected data from the US has changed tapering expectations again.
The correlation between tapering and ‘bond proxy’ equities is a headwind for the fund, but First State looked to emphasise the yield and earnings growth in the sector to justify investors’ continued attention.
“We expect the fund to deliver earnings growth of 6-8 per cent per annum which, combined with a dividend yield of 3-4 per cent and below historic average multiples, should provide global listed infrastructure investors with satisfactory risk-adjusted returns over the next few years,” the managers said.
They added: “We are currently seeing earnings upgrades from the majority of our Japanese and European infrastructure companies, as well as from selected US, Australasian and Chinese names.
“The upgrades, combined with robust balance sheets, strong cash flows and conservative payout ratios, enable these companies to pay a low-risk, inflation-hedged dividend stream.”
Even if the predictions for earnings and dividends growth are correct, the fund may struggle to deliver the same returns it has enjoyed during the years of ultra-loose monetary policy. The fund’s sterling share class delivered a return of 23.4 per cent in the past year and 85.3 per cent in the past five years, according to FE Analytics.
In spite of the headwinds, the team has bought Japanese gas utility Tokyo Gas because it “offers solid risk-adjusted returns with a strong capital management programme”.