THEGIFT777/E+ via Getty Images
Investing in global infrastructure presents potential opportunities and helps support a diversified investment portfolio for income-oriented investors. With increasing urbanization in emerging markets, an energy transition with strong government support, and a digital revolution boosted by AI, the time is now for infrastructure investing. Gain insights from Abrdn Head of Global Income Josh Duitz.
Can you share with us how you would define infrastructure assets?
Josh Duitz: Infrastructure assets refer to the physical structures and facilities that are essential for the functioning of a society. These assets typically serve as the backbone of economic activities and public services.
What are the benefits of investing in infrastructure?
Josh Duitz: We really like infrastructure as an asset class, it adds diversification to a portfolio. In addition, it demonstrates several attributes that other portfolios do not. If you look back, even during the GFC, the Great Financial Crisis, if you look at globally listed infrastructure companies, those companies grew their EBITDA even during the GFC. These companies are defensive companies. Regardless of what happens in the economy, people are going to use their utilities, they’re going to talk in their cell phones, they’re going to drive on roads, and they’re going to use rails. So we really like the defensiveness of infrastructure companies.
That defensiveness allows us to have steady, predictable cash flows. Those cash flows allow us to pay dividends and grow our dividends. There’s an inelastic demand for those services as mentioned. Regardless of what happens in the economy, people are going to use utilities. Another part of infrastructure we really like is the inflation protection part of infrastructure. Many of the assets we invest in get to raise their tolls or tariffs with inflation. For example, one of the companies we invest in Brazil, every single year they get to raise their tariffs or tolls on the roadways with inflation. So good inflation protection component to that. Several of the cell towers have that as well as we’ve seen it in other industries. So that’s a very important part of it. Inflation protection, defensiveness, as well as inelastic demand for the services.
So we think infrastructure is a great asset class to invest. In addition, many of the assets grow with GDP or multiplier of GDP. As we’ve talked about on roads and airline or air travel, it grows as a multiple of GDP. So again, you have defensiveness with the ability to grow with GDP.
How is ASGI structured around infrastructure?
Josh Duitz: We break infrastructure into four different sectors. The first being transportation, and that includes roads, airports, ports, rails globally. We really like roads, for example. Every time an additional driver goes on that road, there’s great operational leverage because it doesn’t cost anything additional for that driver to be on that road and all that revenue goes straight to the bottom line. Generally, traffic grows with GDP in the emerging market. It grows about one and a half times GDP as consumers are getting up that wealth curve and able to afford to buy cars for the first time.
Another sector we really like are airports pre-pandemic, and we believe it’ll revert back now that the pandemic’s over air traffic has grown about one and a half times GDP globally over the past 20 years. So again, now if you go into an airport, many times you’re basically walking into a shopping mall. The airports have recognized captive customers and they’re trying to monetize those customers at the airport. So we really like the airport sector as well. Another sector we invest in is the telecommunications sector, and what we like there are the cell towers. Those are the large towers you see everywhere, which basically allows the cell networks to operate.
Now, what do those cell towers actually do and how does it work? Again, there’s great operational leverage on those cell towers. If you think back to, I hate to age myself, but when I started my career, most of us were just using landline phones, and that slowly emerged to cell phones, and those are just the flip phone phones. The next generation really is smartphones, and the smartphone meant a BlackBerry where all we did is communicate via email on those BlackBerrys. Then the iPhone came along and the smartphone revolution really took place. We do everything including recording this on an iPad. It’s amazing the technological changes that have happened, and we believe the next technological change is from 4G to 5G. And those cell towers are the essential infrastructure which will allow us to move from 4G to 5G.
We’re going to need more towers and denser towers to allow 5G to work, and we’re just in the very early stages of 5G. Just kind of like what happened with the smartphone era, there’s going to be remote surgeries, autonomous driving cars. We’re going to need more and more cell towers globally. Generally, the companies pay a fixed fee that grows with inflation on the cell towers, so great infrastructure asset to invest in. The third sector we invest in is the utility sector and generally, and historically, we’ve been significantly underweight utilities. We have increased our exposure over time due to the energy transition. We saw in the US, we signed Inflation Reduction Act and nothing to do with reducing inflation. In fact, it probably increases in inflation, but that was the largest ever commitment we had to climate change in the United States. We see similar bills in Europe and elsewhere.
Again, great stimulus. We’re going to spend a lot on that energy transition over the next several decades, and we want to be a part of that and we take this great investment opportunities. And then the fourth sector, which we’re significantly underweight compared to our benchmark and our peers, is that energy sector. We only invest in the midstream energy, and those are the pipelines that are transporting the energy. It’s similar to a toll road where there’s a fixed payment to that. So we want to be that toll road collector. So those are the four sectors we invest in infrastructure. We started our first fund over 15 years ago by researching where infrastructure spend and what’s going to take place both by region and by sector, and we use that as a framework of where to invest.
Now, our thinking does evolve over time as you’ve seen with our investments in the energy transition as well as the cell towers as we move from 4G to 5G. One trend that we noticed, there was a tremendous amount of investing on private infrastructure by institutional investors. We’ve seen investments in both public and private infrastructure grow at 17% per year over the past decade to over a trillion dollars. But retail investors did not have that opportunity to invest alongside institutional investors in private infrastructure. So when we launched ASGI three and a half years ago, we thought it would be a unique opportunity to give to retail investors to invest in private infrastructure. In ASGI, we’re allowed to have up to 25% of our investments in private infrastructure, which we believe is a great opportunity going forward.
ASGI is a tern fund. What does this mean for investors?
Josh Duitz: ASGI is a term fund, which is unique in the closed-end fund space. Being a term fund, it does not impact our public investments at all as we invest in very liquid companies, but it does impact our investment on the private side. Generally, our private investments last three to five years, so as we get to the end of that term, we’ll have less and less private investments as we’re winding that down and then with the purpose of returning the assets to the shareholders.
