The common investment view that infrastructure assets are bond proxies that will not perform well when interest rates rise is overly simplistic, according to RARE Infrastructure.
The global listed infrastructure fund manager’s head of Australian retail, Steve Williams, said it was important to examine the cause behind rate rises, adding if it was due to increased economic activity, user-pays assets could benefit.
“For example, as economies grow, rail companies will benefit as they are required to move more goods across their networks and this will offset the impact of the rise in interest rates,” Williams said.
“The important question is whether the underlying cash flows from the infrastructure business are impaired in a rising rate environment.”
The fund manager said investment research firm Morningstar supported its stance, with a recent report pointing to the fact the S&P Global Infrastructure Index had risen more than 10 per cent over the past 12 months despite the United States Fed’s tightening of monetary policy.
Williams said the companies RARE invested in must meet three key criteria.
“Firstly, the asset that the company owns must be a hard, physical asset. Secondly, this hard asset must provide an essential service to society or an economy, and finally, there must be robust frameworks in place to ensure that we, the equity holders of these companies, get paid,” he said.
He noted the frameworks can be regulatory in nature or based on long-term concessional contracts.
“Most regulators allow utility operators to pass on the rise in the cost of capital, so rising rates do not have a major impact on the long-term valuation of assets,” he said.
“However, when rates do rise, shorter-term share market investors tend to reduce their utility holdings.”