- Investment Director
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
After a period of exceptional returns, investors are likely to face a more challenging market environment in 2022, with a slowing recovery, high inflation and the potential for further COVID setbacks and geopolitical flare-ups. As well as navigating this uncertainty, markets will have to adjust to a less supportive monetary policy backdrop as central banks have started the perilous journey towards normalisation.
Given the risk of a bumpy road ahead, we expect a greater focus among investors on incorporating more-defensive features into their portfolios. In many cases, this may also involve diversifying away from a potential over-reliance on a handful of high-growth technology stocks. What constitutes effective risk mitigation will differ from portfolio to portfolio, but we think selective exposure to listed infrastructure assets may be an interesting avenue to explore when building a more defensive portfolio.
The global listed infrastructure universe contains an attractive selection of companies that, in our view, are well positioned to deliver more enduring growth, because they own long-lived physical assets that are critical to the functioning of modern economies. As a result, they may often yield-stable, long-duration income streams. They can also provide diversification potential for portfolios that have perhaps become too skewed towards technology-related growth stocks. Many of these “enduring” businesses have been around for decades and possess strong competitive positions and pricing power, often at least partly linked to inflation via regulation or contract. Frequently, these defensive characteristics are combined with exposure to secular trends such as the energy transition or the data revolution, supporting these companies’ long-term growth prospects. While history is not a guide to future performance, these more enduring assets have shown a degree of resilience to excess volatility. To date, valuations for these enduring assets are also relatively low compared with the wider market, suggesting they may be somewhat less exposed than the broader universe in the event of future volatility.
An experienced active manager, in our view, may be well positioned to aim for a further layer of mitigation by avoiding stocks that may be over-levered or too focused on divident payouts, particularly in light of rising interest rates. Investors also need to be mindful of hidden exposures that can influence the volatility profile of listed infrastructure companies. For instance, some listed infrastructure companies are inherently linked to certain commodities or are more sensitive to the economic cycle.
Finally, with the transition to low carbon now gathering momentum, we think gauging the defensive nature of a stock also involves having an accurate picture of a company’s ability and willingness to prepare for a net-zero future. As discussed in a previous article, many of the companies that own these enduring assets are well positioned to take advantage of the energy transition. But even some of the companies that, on the face of it, appear laggards in preparing for a net-zero future may well turn out to be able to progress much faster than anticipated by the market over the medium term. Again, an active manager with insights gained through deep fundamental research of the company and sector may be better placed to make that assessment and take a forward-looking view, particularly when this research is combined with robust engagement with the board and management.
Listed infrastructure assets can help diversify portfolios that may have become overexposed to technology-oriented growth stocks. Companies with enduring assets in particular display high levels of stability combined with recurring income streams and robust long-term growth prospects, so they could potentially provide some drawdown mitigation in volatile market conditions. Care needs to be taken, however, to minimise exposure to the more vulnerable stocks in the listed infrastructure universe. Provided the above caveats are met, we believe a targeted exposure to listed infrastucture companies with enduring assets could be a valuable building block for a more defensive portfolio.
Is the long-awaited change in Japan’s fortunes finally materialising?Continue reading
Thematic investing focus: The education imperativeContinue reading
Why investing in themes for EM equities may reap rewardsContinue reading
Small-cap value: Strong past, bright future?Continue reading
Thematic investing focus: The future of foodContinue reading
Is the long-awaited change in Japan’s fortunes finally materialising?
Portfolio Manager Dan Maguire explores why Japan may finally be exiting deflation and assesses the opportunities this structural change could create for small- and mid-cap equities.
Thematic investing focus: The education imperative
Education is poised for transformation — and set to see a decade of spending and growth we believe will be unmatched by any since the post-World War II boom.
Why investing in themes for EM equities may reap rewards
Portfolio Manager Dáire Dunne outlines why he is increasingly optimistic about the potential opportunities within select EM equity themes this year.
Small-cap value: Strong past, bright future?
While equity markets have had a challenging recent past, history teaches us that there may be several reasons to be optimistic about small-cap value.
Thematic investing focus: The future of food
The global food system has reached a tipping point and change is coming, creating investment opportunities aided by demographic, policy, and innovation tailwinds.
Thematic investing focus: The transportation revolution has arrived
New technology and environmental concerns are creating a disruptive force in the transportation sector, leading to supply-chain investments and a host of new addressable markets.
Actively supporting the decarbonisation of utilities
Why actively supporting the decarbonisation of utilities offers the potential for better long-term outcomes from both a net-zero and value-creation perspective.