Infrastructure Fund Performance Reveals Sector’s Hidden Diversity
Lonsec Research Releases Infrastructure Securities Sector Review
The classic challenge for the listed infrastructure sector has always been the lack of a commonly accepted benchmark, but market conditions over the past year have highlighted just how diverse the asset class is.
In its recently released Infrastructure Securities Sector Review, Lonsec Research showed that significant dispersion in returns across sub-sectors has thrown up a number of winners and losers across the range of infrastructure sectors, making an evaluation of the overall sector’s performance difficult.
“If you simply look at some of the common infrastructure benchmarks, the sector as a whole appears to have delivered a reasonable return,” said Senior Analyst Nick Thomas. “For example, Lonsec’s listed infrastructure benchmark shows that the sector returned 14.5% for the year to September 2016, which is certainly a strong result in the current global economic environment. But hidden behind these figures is a range of different sub-sectors with their own esoteric risk factors, and varying degrees of sensitivity to some of the macro-economic developments we have seen over the past 12 months.”
This diversity of listed infrastructure has been on full display in 2016. Infrastructure related to the energy sector, such as Gas and Oil infrastructure (Pipelines), experienced large falls in returns earlier in the year as energy prices continued to decline, but have since rebounded as commodity prices have recovered. At the same time, sub-sectors such as Airports and Utilities were among the strongest performers early on, but have since come under increasing pressure.
“Worsening conditions for the energy sector, and concerns about US macro-economic conditions, led to substantial losses for fund managers with significant exposure to rail and pipeline infrastructure,” said Thomas. “However, these have recovered to some extent in more recent times. This really highlights the lack of homogeneity within the listed infrastructure sector, and can have implications when it comes to measuring portfolio performance.”
Fund manager performance split
This diversity across infrastructure sub-sectors has been evident in individual fund results. In the year to March 2016, many fund managers in the Lonsec Research peer group suffered their worst draw-downs since the Global Financial Crisis – although nothing close to this scale. There was a return range of over 20 percentage points between the best and worst performers within both the hedged and unhedged groups. For hedged listed infrastructure funds, the average return over one year was 2.0%, with a maximum return of 14.1% and a minimum return of -11.1%. In contrast, over seven years, the average return was 16.2%, with a maximum return of 20.6% and a minimum return of 11.8%.
“The large differences in peer group performance data is reflective of the fact that listed infrastructure fund managers themselves are positioned differently across sub-sectors and the universe of infrastructure assets,” said Thomas. “Some fund managers have been attracted to what might be considered ‘market darlings’. These are stocks that combine an appealing fundamental growth story with the promise of low volatility and solid yield, and include companies like Sydney Airport and Transurban, to provide a couple of local examples. Those overweight these stocks may have performed well in the past year to September 2016, but will have suffered from recent falls in October and November 2016. But the biggest factors have been fund manager decisions on US Rail and Pipelines, and we have seen movements in these sub-sectors impact portfolios significantly.”
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