While the sector has lower volatility, tends to do better in downturns and has a higher dividend yield, these are the issues investors need to be across.
Not a day goes by without most people in the developed world using a variety of utilities and more than likelyTheir popularity is evident among institutional investors that like the reliable income stream, long asset life, mostly oligopoly or outright monopoly status and, in their case, unlisted holding structure.That they’re unlisted means the holdings are not subject to the vagaries of listed markets and require little meaningful disclosure on valuations.
That is unsurprising. The revenue streams are relatively stable, utilities such as energy, water or gas don’t exhibit substantial economically-related variation,A key issue is the capex intensity, including the risk companies overspend and therefore do not achieve expected returns, or underspend degrading the value of the asset with potential major safety issues. Then there is regulatory risk, nationalisation or possible limits to pricing.
Some infrastructure assets have contracts that allow them to reset their charges based on the CPI, others have slightly more tenuous links but nevertheless can adjust their fees. That should not ignore their increase in operating costs – for example, railways are inevitably affected by energy spikes that may exceed the CPI.Capital investment is also challenged by the spiral in construction and raw material prices.
In the current financial turmoil, listed infrastructure has performed well, evidence of its inflationary buffer and defensive characteristics. It will not always be so – the stocks will be left behind in a rally given limitations on revenue growth and can become overvalued.It is also critical to choose the right manager. The variation in returns, on a hedged basis, has been between 16 per cent and 3 per cent over 12 months.
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