Infrastructure returns fall down

Australian Financial Review

Monday November 16, 2009

Brendon Lau

Disillusioned investors in infrastructure stocks might have good reason to remain wary of the sector with a new index showing that historical returns in this space have not only lagged behind the broader market but their international peers as well.Standard & Poor's and the ASX Group are launching the S&P/ASX Infrastructure Index today. It includes 15 stocks drawn almost equally from the utility and transportation sectors. If this index had been constructed five years ago, S&P estimates that it would have delivered a paltry 3.7 per cent return and the S&P Global Infrastructure Index in US dollars would have returned just over 9 per cent in constant currency terms and the S&P/ASX 300 Index 8.8 per cent over the same period.Furthermore, global infrastructure and the index of Australia's top 300 companies outperformed domestic infrastructure almost threefold on a risk-adjusted basis.This suggests Australian infrastructure stocks do not provide more stable returns than the broader market and most experts believe that the introduction of the new index is unlikely to draw more interest or capital towards these assets."This index would have been of greater value a couple of years ago. International fund managers are already well aware of the Australian infrastructure market. It's probably more to meet demand from S&P's clients for a more relevant benchmark," Macquarie Group analyst Ian Myles said."It might drive incremental buying but I would be surprised if the index itself would be a [key] driver of the sector."S&P describes the domestic infrastructure industry as "one of the largest infrastructure markets" in the world and said the index was created to provide investors with liquid exposure to Australian-listed infrastructure companies.Equity Trustees' head of asset management, Shaun Manuell, also doesn't believe the index would have a material impact on the sector, and that the term "infrastructure" has been too loosely used. "It was interesting how in the last bull market - when infrastructure was super hot - that everything was being defined with infrastructure-like attributes. "It came down to the fact that people were [trying to justify] really high earnings before interest, tax, depreciation and amortisation multiples and gearing," he said."How we define an infrastructure asset is it has monopolistic characteristics, the industry has huge barriers to entry and big capital expenditure upfront - but then the ongoing marginal cost is very low to get very steady income streams, and their revenue is relatively consistent."For this reason, Mr Manuell doesn't think companies like Asciano Group can be defined as infrastructure - a descriptor that was used by investment banks to sell the float a few years ago. He said the train tracks might fit the bill but not the trains that the group owns. (Asciano is not part of the new index.)"Take toll roads as an example. The road might be infrastructure but the trucks that travel on them aren't. That's why we always try to break it down and are suspicious when investment banks come out to say 'we've got this great infrastructure play'," he added.With respect to the make-up of the new index, Aberdeen Asset Management investment manager Michelle Lopez said that utility and transport companies were very different beasts and that investors should be aware about these differences."The key difference in utilities is they are very cash generative but the upside is capped in the sense that 90 per cent of their revenue is set by the government. The positive of that is, if they get an increase in financing costs, it gets covered at the next [price] reset," said Ms Lopez."For a transportation company like Macquarie Infrastructure Group there is not that security over their earnings so there is no floor [for revenue] in the sense that if traffic or demand drops off, it would really hurt their earnings. But on the positive side, there is more potential upside from an operating leverage point of view."

© 2009 Australian Financial Review

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