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Infrastructure investors should choose GDP-sensitive assets over utilities.

That’s because there’s been a shift away from defensive, higher income utility investments, says Nick Langley, investment director and senior portfolio manager of RARE Infrastructure in Sydney. He manages the Renaissance Global Infrastructure Fund.

One of the main reasons for that shift, he adds, is utilities are more expensive. Also, “there has been a global drive toward yield investing over the last 18 months to two years.”

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By the first quarter of 2013, for example, “a number of [utility] investments weren’t meeting our return thresholds,” says Langley. “We sold them and we’ve been recycling the capital.”

That capital has been shifted toward growing infrastructure assets like rail and port companies, as well as toll roads and airports.

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In particular, Langley and his team see “a path to growth across both the U.S. and European economies.” He predicts the U.S. will have a strong growth year in 2014. And though Europe may take another couple years, it’s on a path to recovery.

Target growth

The World Bank published a report in 2006 that noted infrastructure stocks across the globe were collectively worth an estimated US$20 trillion, says Langley. Currently, the majority of infrastructure (75%) is owned by governments, while only 25% is in private hands. The bulk of the latter is listed.

And “one of the things we know about infrastructure is it needs to be replaced and refurbished over time.” In fact, US$1 trillion of capital must be invested globally each year until 2026, according to the World Bank report.

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Langley finds “emerging markets…[are] still building new roads and new power stations…[They’re] expected to spend about US$20 trillion over the next couple of decades to expand their infrastructure” and ramp up their economies, according to a Morgan Stanley Report.

But “we have a lot of investment required, and that capital will need to come from both the equity and the debt markets since governments can’t afford to spend all of that money,” he adds.

Across the globe, economies will need to attract capital to fund their projects, and investment opportunities will thus open up.

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“What [infrastructure investors] are looking for is confidence they’ll earn returns on their funds over a longer period of time,” says Langley. To help clients, managers should look for projects with stable regulation, as well as those that have contracts for concessions, such as toll roads.

It’s important that these contracts “stand up in a court of law if…tested. That’s one of the key things we look for as we’re investing in some of these projects,” adds Langley.

He says concession contracts have been tested in countries like Brazil and Mexico. And in those emerging markets, “governments have lost, which is good for private investors.”

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