With listed infrastructure companies passing inflation directly on to their customers, investors can use them as a hedge against rising inflation, according Thomas van der Meij of Van Lanschot Kempen, a Dutch wealth management firm active in the Benelux region.
“Communication towers, toll roads and, to a lesser extent, airports perform well in a high-inflation environment. Meanwhile, US railways and energy transmission companies are benefiting from high commodity prices,” he explained.
The advantage of passing on inflation by infrastructure companies is that such price increases are often contractually fixed for several years. And because all companies in the sector work that way, competitors will not just take your place.
In the $100 million (€86 million) mutual fund with nearly a three-year track record in listed infrastructure that he co-manages (available throughout the Benelux area), the most recent adjustment in asset allocation is an expansion of positions in toll roads, transportation companies and certain airports. The managers made some of these decisions because of the rising inflation mentioned above, but the developments surrounding Covid also play a major role.
The pandemic had previously depressed the prices of many airports and transport companies, while it helped digital infrastructure companies to gain share prices. Van der Meij: “In the summer of 2020, the prices of transport companies had fallen very sharply due to the consequences of Covid, so we started to add some risk after the summer. We were already in toll roads, but we expanded our position on the basis that people would travel more once the borders opened again.
“The recovery at airports followed, although there was a significant difference between European locations. While the Greek airport was still only less than 20 per cent below its 2019 volume number in August this year, the difference at Charles de Gaulles and Heathrow was more than 50 per cent. We chose airports with a lot of short-haul flights at the beginning, because family visits came first. And for some emerging countries, because tourism started earlier there.”
Energy transition
For the coming year, Van der Meij is focusing on energy transition. He will not do this through “pure players”, but through integrated utility companies. “That type of company does not get the attention it deserves. Many investors look at how clean a company is today, instead of in the future. Many utilities do invest in the energy transition, but they also have fossil. We believe that high-voltage networks are crucial to make the energy transition possible. I expect high returns there.”
The fund manager explained this statement with reference to a position in renewable energy company Orsted, a company in which the fund previously had a position, but now no longer does. “The prices of several US utilities that operate onshore wind farms have risen much less, because they also have minimal exposure to coal and gas. Eventually that will be replaced by clean energy, but that will not happen overnight. For us, it is important that the management keeps a broader view. So that they want to phase out and replace the power stations and emissions, but also make plans on how to reintegrate employees and not let the energy bill for private individuals rise too much.”
“Investing in the energy transition is about looking ahead,” he said. “It is good to invest in clean energy, but we believe it is better to work with the companies that can make a difference by reducing CO2 emissions. An important condition for us is that a company has committed itself to the Paris Agreement, and wants to help strive for net-zero.”
Infrastructure as the main activity
Another important condition for a position in the fund is that a company spends at least 70 per cent of its activities on infrastructure. According to the manager, the definition of listed infrastructure can differ per investor or client. “We are reasonably strict in the three directions we distinguish: transport, digital infrastructure and energy. A toll road company may well have a construction branch to expand the toll road, but that cannot generate more than 30 per cent cash flow for a position in our fund. The main focus should be transport.”
Since its launch in 2019, the fund has achieved an annualised return of almost 13 per cent. “Attractive for the sector,” noted Van der Meij. “If you invest through the cycle, for listed infrastructure you should be able to get a high single-digit or low double-digit return. We are nicely at the top of the range.”
In absolute terms, the fund achieved a net return of over 28 per cent in 2019 and a return of almost -7 per cent in 2020. Van der Meij: “2020 was a more difficult year because of Covid, absolutely. But if you look at it relatively, we did enormously well. More than 500 basis points outperformance after costs that year. I am very happy with that.”
The fact that the fund has only existed for a relatively short time is because the category of listed infrastructure is still relatively new. At the beginning of 2000, the supply was not yet large enough to build up sufficient diversification, according to Van der Meij. “Over the past fifteen years, the category has developed enormously, in the number of IPOs but also in the size of existing companies. The sector has matured in recent years, which has also made it interesting for institutional parties.”