By Shane Hurst
Managing Director, Portfolio Manager,
ClearBridge Investments, part of Franklin Templeton
Inflation has been the major theme dominating the investment world in 2022. Canada’s annual inflation rate reached 6.8% in April, representing a 31-year high. Canada is far from an outlier in this respect, with the U.S., the U.K. and many other western nations also experiencing rapid price growth over the past 12 months. In response, central banks have committed to a series of rate hikes this year, which in turn has raised the prospect of a global recession.
In this uncertain environment, market volatility has been elevated, particularly so in bond markets. Downside protection is front of mind for many investors as a result, but there are options out there to still generate returns for a portfolio without loading on risk.
Infrastructure assets, once the preserve of institutional investors, can now be a useful tool for retail investors and help in limiting risk and providing a stable income stream. Launched in Canada last year, Franklin ClearBridge Sustainable Global Infrastructure Income Fund (available as an ETF through FCII), harnesses the expertise of ClearBridge Investments, one of Franklin Templeton’s specialist investment managers. ClearBridge manages infrastructure income funds in the U.S., U.K., Australia, Europe and Canada, with global AUM of US$4 billion, as of March 31, 2022.
An asset class that makes economies function
Infrastructure as an asset class can be loosely defined as the services and facilities necessary for an economy to function. With the ClearBridge Infrastructure strategy, the portfolio is made up of regulated assets (e.g. electricity infrastructure and sewage pipes) which are characterized by stable cashflows, high income and low GDP exposure, and user-pay assets (e.g. airports, ports, railroads and toll roads) which generally provide lower income but are leveraged to GDP.
The investment team can take on a more defensive posture as circumstances dictate. For example, prior to the extreme sell-off of 2020, the strategy had a higher weighting to lower-risk regulated assets, which served it well during that period when its decline was approximately half that of its benchmark S&P Global Infrastructure Index.
Fast-forward to today and the impact of more hawkish monetary policy on markets and the wider economy is a real concern. Whether a large correction in markets is in the cards is splitting consensus, but either way, the importance of effective risk management is crucial. In this respect, infrastructure assets can make a real difference for investors.
Predictable income distributions
Regulated assets provide predictable income distributions as they are usually government regulated, and/or have long-term contracts that provide stable cash flow and greater capital stability. These assets also have an explicit link to inflation through regulation, concession agreements or contracts which provide inflation protection to investors: this is especially relevant in the current climate.
Corrections and recessions are a natural part of a market cycle, but when investing in infrastructure, the main consideration is usually the long term. Infrastructure spending is expected to grow substantially in both developed and emerging economies. This investment will transform the global economy and the world we live in, but also create a host of new opportunities for investors.
There are significant tailwinds for infrastructure, including the demand for mobile data, the recovery from COVID-19, the mispricing of listed assets relative to unlisted assets, as well as the multi-decade tailwind of decarbonization. Taken together, it means that right now is an opportune time to invest in infrastructure assets in your portfolios.
Shane Hurst is Managing Director, Portfolio Manager, ClearBridge Investments, part of Franklin Templeton. Shane co-manages all Global Infrastructure Strategies. He has 24 years of investment industry experience. Shane joined a predecessor organization in 2010. Previously, he was Director, Infrastructure Securities, at Hastings Funds Management as well as Portfolio Manager and Investment Analyst at Tribeca Investment Partners and Investment Analyst at AMP Capital Investors.
The Author’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. ClearBridge Investments, part of Franklin Templeton Investments Corp.