CEFA: Welcome to CEF Insights, your source for closed-end fund information and education brought to you by the Closed-End Fund Association. My name is Diane Merritt. Today we are joined by Bob Becker, Senior Vice President, portfolio manager, global infrastructure at Cohen & Steers, and we are happy to have you.
Bob: Thanks Diane. It's great to be here.
CEFA: Bob, Cohen & Steers has developed a significant business as a manager of infrastructure investments. Can you discuss the key characteristics of listed infrastructure, and the benefits and risks they present to investors?
Bob: Sure. I'd be happy to Diane. The key essential element of infrastructure is that infrastructure is really essential to economic growth, and there's a growing awareness amongst governments and policy makers around the world that you have to have adequately invested infrastructure systems in place to attract investment. So that's the key characteristic. It's really essential to economic growth, and then beyond that they have long-lived assets. This is steel in the ground, it's going to be there for decades. They also have high barriers to entry, so that's important because it keeps a lot of the competitive threats at bay. And then they also have regulated or concession-based pricing on their contracts, and that's very important as well because while that sometimes can cap your returns, it also affords a lot of visibility and stability to your cash flows.
CEFA: Passive investment strategies in various asset classes have gained a lot of traction in recent years. Cohen & Steers is an active investment manager. In the global listed infrastructure sector, what advantages do you see for an active manager with respect to managing risk and adding to performance?
Bob: Well, it's important to have an active strategy in infrastructure in our opinion. While passive strategies do offer lower fees, we feel like infrastructure really lends itself to an actively managed strategy, and there's a couple of reasons for that. The first one is, while we talked about the shared characteristics of infrastructure, like their long-lived assets, they have high barriers to entry. They're actually very different businesses, and they behave differently in different macro environments.
For example, if the economy is really strong, certain sub-sectors of infrastructure such as the transports, toll roads, ports and airports, perform quite well. Whereas a more defensive sub-sector of infrastructure such as a regulated utility will often lag in terms of cash flow and stock price performance. In fact, if you look back historically, there has been a large dispersion in returns between the best and the worst-performing sub-sector of infrastructure. So depending on the macro environment, certain sub-sectors will do well, others will lag, and so that's a perfect environment for an active manager.
CEFA: Cohen & Steers manages a traditional closed-end fund, Cohen & Steers Infrastructure Fund, symbol UTF, do you find the closed-end fund structure to be advantageous in managing a portfolio of infrastructure investments?
Bob: We do, Diane. The closed-end fund structure is efficient in several ways. We can minimize trading costs, if we don't have to buy and sell depending on the daily flows in the fund like an open-end fund has to contend with. Further there's tax efficiencies from that as well. If you don't have to sell stocks to meet outflows, you don't have to generate potentially capital gains. So it's a much more efficient structure.
Our closed-end fund, UTF is the ticker, is very large. It's $3 billion in managed assets. And so as one of the largest dedicated infrastructure investors, that also affords us a lot of advantages like access to companies, regulators and industry participants.
CEFA: The US economic expansion is about 10 years old, but in many areas of the world, growth is quite slow. At what stage do you see the economic cycle?
Bob: We do see us in the latter stages of the economic cycle, but we should note that we have seen a slight improvement recently in the macro. Basically, the Fed’s hikes appear to be on hold for the time being, but that being said, that does have important implications for your portfolio.
CEFA: How does this impact the way you structure your portfolio?
Bob: Well, as I mentioned before, not all infrastructure is built the same and they do behave differently in different macro environments. So if we are correct, that we are in the latter stages of the economic cycle, we'd want to increasingly have greater allocations to the more defensive parts of infrastructure. So we tend to have greater allocations to sub-sectors like wireless tower companies, midstream energy and utilities.
CEFA: And how has infrastructure previously performed in late cycle environments?
Bob: Infrastructure has done very well in the latter stages of the cycle. We've looked back at the data going back to the early 70s, and on average in the late stage of the business cycle, infrastructure tends to outperform the broader equity markets by around 5%.
CEFA: Well, infrastructure is interesting as the global requirements for infrastructure investment is significant, but government budgets are already stretched. How do you see these needs being addressed by governments and the private sector?
Bob: Well, you're right, Diane. The needs are significant. Governments can play a role. They can provide attractive regulatory structures that will incent new investments and they can also help by privatizing assets. And we've seen a number of infrastructure assets privatized around the world in recent years. For example, you've seen the Spanish airport network, the Mexican electricity grid, Charles de Gaulle, the French airport is being put up for privatization this year; Asian wireless tower assets, the Australian railroad network. So a lot of big marquee assets have been privatized. So there's still a lot of potential for further privatization. For example, in the U.S., the U.S. is actually the only advanced developed economy that hasn't undergone widespread privatization of transportation infrastructure, roads, ports and airports.
In terms of the private sector, it's important to understand that we don't need the government to privatize assets for us to have investment opportunities. The private sector is meeting the demands and putting capital where it's needed. In fact, there's been hundreds of billions of dollars of capital invested in midstream energy and telecom infrastructure in North America.
CEFA: How are listed companies positioned to take advantage of these developments and are their fundamentals attractive?
Bob: The fundamentals are very attractive, and they are very well positioned to make these investments. The first thing to look at would be their ability to make these investments from a balance sheet perspective, and the balance sheets generally for infrastructure companies are very strong. So they are well positioned to make these investments, and to the extent that they need to come to back to the markets to raise equity capital, there is high demand on the part of investors for these types of assets. So the capital markets will be there to the extent that companies need to come back and access them.
CEFA: Are the valuations in the listed infrastructure space at attractive levels?
Bob: We think they are. Listed infrastructure companies are trading around 11 and a half times cash flows. So that's a little bit above the long-term average, which is about 10 and a half times forward cash flows. But importantly, they're only trading at about a 10% premium to the broader equity markets. And that's important to consider because historically they've traded at much larger premiums. So they're a little bit above long-term averages, but they're a lot cheaper relative to the broader equity markets.
CEFA: Where do you see the best opportunities from both a global/country perspective and among sectors within the broader definition of infrastructure?
Bob: Sure. North America remains our favorite area right now, and that's one, partly as a result of us being constructive on the U.S. economy, but it's also because we're very bullish on the outlook for midstream energy companies and wireless tower companies.
CEFA: Bob, how do you believe an allocation to listed infrastructure is best positioned in an investor’s diversified portfolio?
Bob: Well, Diane, that's really up to the investor and their advisor. But we do believe that infrastructure offers a unique combination of historically attractive returns, equity-like returns with lower volatility. So the standard deviation of infrastructure relative to the equity markets has been a lot lower, and you also have downside protection. So if you want a portion of your portfolio to be allocated to a sector that has attractive growth, but also defensive qualities with downside protection then infrastructure is for you.
CEFA: And why is now the time to allocate to the asset class?
Bob: Well, Diane, we think it's a good time to consider infrastructure because as we said earlier, we believe we're in the later stages of the economic expansion, and as economic growth starts to slow, that's the time when infrastructure, historically at least, has outperformed, plus, we believe we're in the early stages of infrastructure emerging as a separate asset class, and more and more investors, including large institutional investors are starting to look at listed infrastructure allocations as a core part of their portfolio.
CEFA: Bob, we appreciate that you've taken the time to join us today.
Bob: Thanks, Diane, it's my pleasure.
CEFA: And we want to thank you for tuning into another CEF Insights podcast.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.