Australian listed infrastructure different to global

The Australian listed infrastructure sector has underperformed in recent months, delivering -21.40% for the period to 31 July 2008. This was significantly worse than the performance of the broader global infrastructure and utilities listed market, which returned -11.56% over the same period*.

This has raised concerns among Australian investors about the defensive characteristics of infrastructure as an asset class. Many investors are, in our view, incorrectly assuming that listed infrastructure markets, both global and domestic are the same. However, several structural aspects of the two markets make them significantly different. Consequently, the Australian listed infrastructure market should not be used as a proxy for global markets for a number of reasons.

Distribution sustainability

Many Australian listed infrastructure stocks are currently paying high levels of distributions out of capital rather than operating cashflows. This is a practice not widely followed in global markets. Greater borrowing, while enhancing equity returns introduces higher distribution risk. The current credit market conditions have highlighted the lack of sustainability of paying distributions from sources other than the underlying business’ cashflow. It is no coincidence that many Australian listed infrastructure companies are now reducing pay-out ratios and reviewing distribution policies.

Greenfield assets, (which are yet to generate revenue) such as the Australian toll road operator, BrisConnections, are using borrowings to pay distributions to investors. Given current poor sentiment surrounding this practice, this is one key reason why the stock has performed poorly since it floated. In Europe, greenfield assets are not usually floated on public stock exchanges. Because they are still in the start-up, development phase, these assets are considered to be too risky to be sold to retail investors. Listed infrastructure companies, globally, tend to be more established and mature and therefore in a better position to pay distributions from operating cashflows rather than relying on debt.

External management model under pressure

In Australia, around 60% of listed infrastructure stocks are structured as externally managed vehicles. These vehicles possess inherent conflict of interest risks due to the large volumes of transaction advisory service fees they typically pay to a sister investment bank or parent company. They often interpose two to three layers of debt at the asset and fund level resulting in additional layers of covenants and importantly less transparency to the end investor. Manager incentives also tend to focus on fund size growth, a feature not necessarily aligned with investor interests. Globally listed infrastructure companies are more simply structured to provide greater transparency and alignment of interest with investors by avoiding the ‘principal-agent’ conflict of interest issues prevalent in externally managed vehicles. A good example is Enagas plc, a natural gas transportation and storage company in Spain and one of the top ten listed investments in the AMP Capital Core Infrastructure Fund.

Higher gearing levels

Listed Australian infrastructure stocks are relatively highly geared in comparison to their global peers. Gearing levels in Australia are at around 70% to 80% versus an average gearing level globally of under 50%*. In the current environment of high interest rates and refinancing risk fuelled by the credit crisis, higher gearing levels are definitely seen as a negative factor by potential investors.

The AMP Capital Core Infrastructure Fund

The AMP Capital Core Infrastructure Fund consists of a portfolio of mature listed and unlisted assets with an established track record of solid operating performance. The Fund is well diversified in terms of geography, customers, sectors and regulatory regimes. This means that the portfolio is not unduly exposed to the potential underperformance of any single investment. There is no gearing at the Fund level, and at the asset level, gearing of the unlisted component ranges between 32% and 50% while the average gearing in the listed part of the Fund is 41% as at 31 July 2008. Within the AMP Capital Core Infrastructure Fund, the Australian listed infrastructure exposure is less than 2%.

*Source: AMP Capital Investors Global Listed Infrastructure Securities Fund; results in local currency from November 2007 to 31 July 2008.

Find out more about the AMP Capital Core Infrastructure Fund.

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