Research house Morningstar has urged financial planners tempted to pile into infrastructure funds to avoid thinking of the asset class as a safe bet.
“Companies can be geared aggressively and misvalued and their share prices will fluctuate as a result,” Morningstar head of adviser and research Anthony Serhan said.
A lot of companies have geared themselves up to boost rates of return, confident that revenues and cashflows will materialise to service this debt.
Because many assets earn low returns and require substantial amounts of capital, this leverage is only sensible up to a point.
An aspect that is often overlooked is the ability of infrastructure companies to refinance debt with watertight lenders.
“We think it’s best to limit exposure to global listed infrastructure because loading up on any of the strategies we’ve assessed exposes investors’ portfolios to sector-specific risks,” Serhan said.
“We believe the strategies reviewed are best used in supporting roles, potentially in a real estate allocation or as part of a broader global equities sleeve.”
The research house has assigned a “recommended” rating to only two strategies in the sector – the RARE Infrastructure Value Fund and the Vanguard Global Infrastructure Fund.
“RARE, led by co-captains Richard Elmslie and Nick Langley, impressed us because of the understanding of macroeconomic and company-specific issues,” Serhan said.
“Vanguard’s disciplined focus on identifying infrastructure securities best satisfying criteria on defensiveness and conservatism, in conjunction with a low-cost, tax-effective approach, convinced us of the merits of this custom-built indexing strategy.”
