Infrastructure is thought to protect against inflation as its pricing power is often monopolistic and tends to be linked to the Consumer Price Index (CPI).
In Zenith’s 2013 Infrastructure Sector Review, however, the research house found this very much depends on the attributes of the sub-sector.
“Given the differences in sub-sector characteristics, the level of inflation linkage in underlying earnings can be materially different,” Zenith investment analyst Jonathan Baird stated.
Zenith believes more highly regulated industries will provide investors with a superior level of inflation protection as they have stronger pricing power.
However, they caution investors in assuming that these industries offer “a perfect hedge against inflation” as “there is often a time lag from when inflation becomes present in an economy and the infrastructure company adjusting its prices”.
The firm also recommends investors look at the inflation level within the domestic economy, as well as the hedging ability of companies’ cash flows.
On a more general thematic level, they stated that “a conservative definition of what truly fits within an infrastructure universe will provide the greatest hedge”.
The other area Zenith looked at was infrastructure’s ability to protect against economic downsizing or downswings.
They found that in months where the MSCI World Index exhibited negative performance, the S&P Global Infrastructure Index returned positive figures 34 per cent of the time.
This “suggests that infrastructure securities offer downside protection in broader market downturns”, Zenith stated.
However, again they caution investors assuming that infrastructure securities can be relied on as a complete hedge against downswings.
According to Mr Baird, “listed infrastructure provides downside protection. However, the level of protection diminishes as the magnitude of the market downturn increases.”
Ultimately, Zenith argues using skill specialist managers is the best way to maximise the benefits of the asset class.
“Active management is the best way to access both the downside protection and inflation hedging benefits of listed infrastructure, and the inclusion of listed infrastructure in a diversified portfolio can [also] improve the risk return characteristics,” it said.
