Essential infrastructure: Back to the Future II

Essential Infrastructure offers investors long-term cashflows from assets that are essential for the functioning of society. In terms of accessing essential infrastructure, having a clear definition for how you are investing is critical.

What is essential infrastructure?

We define Essential Infrastructure as the assets that are essential for the functioning of society. In terms of accessing what we term essential infrastructure, having a clear definition for how you are investing is critical.

Whilst infrastructure assets have existed for thousands of years (such as Ancient Greek ports, Roman aqueducts and roads like the Appian Way, bridges, tollways, Chinese defensive walls, and so on), as a modern investment-grade asset class, infrastructure is relatively young. Australia is credited as developing the modern investment grade infrastructure asset class that we know today, in the 1990s, in the form of both unlisted funds and listed infrastructure assets, as well as listed infrastructure companies (Inderst, 2014)¹.

Listed infrastructure assets have been around for a number of decades, but the first current dedicated global infrastructure index, the S&P Global Infrastructure Index, was only launched in 2007. 

Together with modern infrastructure’s relative ‘youth’, its rapid expansion, as governments worldwide seek to shift the cost and risk-bearing of infrastructure to private investors, means that how we define infrastructure has also been evolving.

Recently, infrastructure has adopted terms typically associated with private equity (core, core+, core++, value add and opportunistic) to describe different assets on their basic risk and return characteristics (Figure 1). These categories have stuck, regardless of their suitability for accurately defining infrastructure assets on their underlying characteristics.

How Ausbil is invests in infrastructure

At Ausbil, we're taking a back-to-basics approach to the space through the Ausbil CORE Global Listed Infrastructure Strategy (CORE Strategy), which seeks to provide exposure to listed infrastructure companies through a fundamentally curated universe, active inclusions and exclusions, rules-based portfolio construction, low tracking error and long-term contracted and regulated cashflows.

Figure 1: Defining the essential infrastructure universe

The Ausbil essential infrastructure universe has demonstrated much more stable earnings across the cycle than global equities largely because of the contracted, regulated and long-term nature of the assets and companies that meet Ausbil’s strict criteria. By definition, essential infrastructure should be less exposed to cyclical returns and demand risk than global equities, and so its earnings (EBITDA) and earnings growth profile should be more stable and predictable, as illustrated in Figure 2. 

Excluding 2020 and the associated extreme impacts of COVID, the Ausbil essential infrastructure universe has not had a year where earnings have been negative, thus highlighting the defensive characteristics of this definition. Furthermore, even in 2020, Essential Infrastructure cash flows were significantly more resilient than global equities despite the transport sector (such as airports, and to a lesser extent toll roads) being at the epicentre of COVID and its impacts.

Figure 2: Steady earnings growth across the cycle

Stable earnings and cashflows are a defining characteristic of essential infrastructure investing. Ausbil’s approach in defining the essential infrastructure universe includes identifying those companies that can provide these cashflows over the long term through regulated and contracted earnings, and with historically lower variability than the earnings growth of global equities, as illustrated in Figure 3.

Figure 3: Less earnings (EBITDA) dispersion in returns than global equities.

Up and down capture. Critical to an understanding of the performance of the Ausbil essential infrastructure universe is a simple understanding of how it performs in up and down markets. Figure 4 illustrates how the Ausbil essential infrastructure universe performs in up and down markets compared to global equities.

Figure 4: Upside downside capture

We can see from Figure 4, that during the period from 2005 to 30 June 2026, the listed Ausbil essential infrastructure universe (based on Ausbil’s tight definition of essential infrastructure) captured approximately 76% of the average monthly falls experienced by global equities in down months. This measure is known as downside capture. Over the same period, the Ausbil CORE essential infrastructure portfolio captured approximately 74% of the rises experienced by global equities in up months known as upside capture.

Over this period, essential infrastructure demonstrates asymmetric returns skewed to the upside, meaning that it loses far less in falling markets than it is able to capture in rising markets. In other words, its return distribution is skewed to the upside.

A hedge for inflation. Infrastructure, as an asset class, can have inflation protection characteristics linked to regulation and contracts that allows prices or cashflows to adjust over time. For investors, this may provide some protection during periods of high inflation compared to assets without these features. Ausbil’s Essential Infrastructure approach seeks to focus on companies with stronger inflation protection characteristics than broader approaches to the asset class.

Figure 5 below illustrates the inflation protection characteristics of Ausbil’s Essential Infrastructure Fund. On a weighted average basis, around 97% of the Fund displays strong inflation protection with only a small percentage directly exposed to competitive markets where lesser inflation protection exists.

Figure 5: Inflation protection characteristics of Essential Infrastructure

Breaking this down, ~60% of the Fund has explicit inflation protection – typically where there is a very direct link between actual inflation outcomes and cash flows providing best in class protection for investor returns. Implicit inflation protection represents a further ~27% of the Fund where there is an indirect link between inflation outcomes and cash flows offering strong inflation protection. Fixed escalation means that there are fixed percentage increases in prices and/or revenues irrespective of inflation outcomes. 

These are confined to the mobile tower companies and still provide sound inflation protection qualities given their cost structures largely mirror this fixed escalation in revenues. Whether an Essential Infrastructure company provides explicit or implicit inflation protection is determined by its characteristics – the nature of the regulation that might apply or contract/concession that exists.

Conclusion

Defining the asset class carefully has become increasingly important as the definition of infrastructure has broadened across both listed and unlisted markets. As private equity and unlisted infrastructure managers have expanded their investment mandates, the asset class increasingly includes businesses with greater exposure to commodity prices, competition, economic cycles and other risks that are less consistent with the traditional characteristics of infrastructure. 

We believe that applying a strict definition of Essential Infrastructure provides investors with a more targeted way to access the underlying characteristics they are seeking from the asset class.

Passive infrastructure indices can also introduce unintended exposures. Index construction is driven by predefined classification methodologies and rules, which can result in exposure to companies or sectors that do not meet a specialist investor’s definition of Essential Infrastructure. Conversely, companies that exhibit strong infrastructure characteristics can be excluded simply because they do not meet an index provider’s classification criteria.

The CORE Strategy takes a different approach. Ausbil’s infrastructure specialists fundamentally curate the companies eligible for the strategy, drawing on deep industry and company knowledge. We look through the corporate structure to understand the underlying assets and cashflows, rather than relying solely on index classifications or revenue mix. 

This allows the CORE Strategy to exclude businesses where commodity, competition, cyclicality, leverage, liquidity, regulatory or other risks dilute the infrastructure characteristics, while also identifying companies that may be overlooked by traditional infrastructure indices.

Click here to read more about Ausbil's views on Essential Infrastructure.