How infrastructure can have a social edge

Finding your niche as an infrastructure investor can be somewhat trickier than other asset classes, according to Jim Lydotes, portfolio manager at The Boston Company.* In its own right, the asset class is often adopted in order to find differentiated returns from the mainstream assets of equities and bonds.

Lydotes, who runs the BNY Mellon Global Infrastructure strategy, says traditional infrastructure funds - listed or bricks and mortar - will typically hold investments across the energy, transportation and utilities sectors, but he believes it to be a fairly narrow opportunity set.

He can see why; investors have always been drawn toward the asset class in search of the trinity of investment criteria - stable underlying cash flows; regulatory predictability; and businesses that are asset owners, or “rent collectors.” 

“Take the example of an energy pipeline – you have a high contracted revenue on an asset that lasts 100 years.”

As such, infrastructure has become typified by economic infrastructure, with toll roads, pipelines and utility providers featuring heavily among the peer group.

“I have always thought that for anyone managing assets in this space, it is important to take a broad view to define infrastructure assets,” he says.

“Historically, investors have sought these traits from the economic infrastructure. Yet we are finding that we can still find these key characteristics in social infrastructure.”

Believing the development of social infrastructure to be increasingly important, he has identified opportunities in areas such as retirement housing, the telecoms sector, hospitals and prisons.

Barriers to entry

“Since the global financial crisis, governments have no longer been able to fund certain areas of infrastructure and have increasingly outsourced parts of this in areas such as prisons and hospitals.”

“It is possible to bring private capital into the market to create infrastructure governments can simply no longer afford to fund,” he says.

However, he recognises there are very high barriers to entry for these industries.

“Regulatory oversight is very high, and liscening and high operationing costs continue to be a challenge. Nevertheless, I believe there are investment opportunities for the thoughtful investor.”

By taking a broader view, the manager is not only able to differentiate his portfolio but can pick up assets at a better price by shopping beyond the more popular benchmark holdings, giving his portfolio a value tilt.

Better prices off-benchmark?

“We have always taken a much broader view and while we still keep in mind traditional infrastructure attributes, we do not stick to the same criteria as our competitors,” he explains.

“We have the ability to invest in telecom infrastructure, care facilities and other types of very specific infrastructure as well as more traditional assets. This expanded opportunity set allows us greater control over how much we pay for what we buy.”

Further, he is able to tap into larger macroeconomic themes by taking a more forward-looking view, without compromising those three underlying characteristics; those around cash flow, regulation and income.

Lydotes says there is a slow but definite mindset shift taking place among his fellow investors, opening their collective minds towards less traditional types of assets.

He points to the inclusion of telecoms in the MSCI Global Infrastructure Index, which hitherto was never considered within the infrastructure sector but has since been more widely recognised as sharing many of the qualities of a regulated utility, in terms of business model.

“None [of our peer group] used to own REITs, or asset-owning telecoms businesses – things are starting to evolve and these can now be seen as on par with energy or electricity. The mindset is changing.”

Investing in the Agents of Change. Find out about the BNY Mellon Global Infrastructure Income Strategy here.

The value of investments can fall. Investors may not get back the amount invested.

*The Boston Company is a brand of BNY Mellon Asset Management North America Corporation. On 31 January, 2018, The Boston Company and Standish merged into Mellon Capital to form a combined entity, which immediately changed its name to BNY Mellon Asset Management North America Corporation.

For Professional Clients only. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. For further information visit the BNY Mellon Investment Management website. INV01391 Exp 13 Nov 2018.

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