Livewire – Glenn Freeman – 25th June 2022
An Australian pioneer of infrastructure investment, Lazard Asset Management’s, Warryn Robertson, heads up a team managing more than $20 billion of assets. He lives and breathes the asset class, which has been a focus for almost his entire career. This includes his two decades at Lazard, where he is portfolio manager of the Lazard Global Infrastructure Fund and the Global Equity Franchise, and the years prior as an adviser to infrastructure investors.
The big three inflation-hedges
When looking to add inflation protection to their portfolios, these are the main areas investors favour:
- Commodities – gold, aluminium, copper and coal
- Real estate – REITs and property assets more generally
“And there are stark differences between those in terms of why they provide inflation protection,” Robertson says.
For the first, the long-term prices of mining companies hinges on the price of the commodity. This in turn is set by the marginal cost of production. “So, inflation is implicit through the cost base, it’s not explicit,” he says.
REITs also provide inflation protection but they’re also typically shorter-term contracts.
“Landlords will have three to five-year contracts and they usually have an inflation element built into those. After which, you can make your choice. So, it’s a bit more like commodities in that it’s supply and demand-driven.
And then there’s infrastructure, where the inflation protection is regulated, “It’s not something that’s related to supply and demand, and that’s the key difference,” Robertson says.
The other key advantages, in Robertson’s eyes, are that infrastructure assets are monopoly-like and they’re essential services. This means their volume demands (pandemics aside) are more stable and consistent than those for commodity producers and REITs.
“I think everyone should have some infrastructure in their portfolios, and with inflation becoming an issue, its protection attributes are unique,” Robertson says.
Infrastructure often conjures images of concrete, pipes, and wires— things that do not have an obvious place in the stereotypical picture of sustainability. However, infrastructure companies are key to governments’ ability to carry out their own sustainability policies and indeed often act as the delivery mechanism for those policies. While the trend toward net zero carbon is accelerating, reducing emissions is far from a new development for infrastructure companies, which have been managing the energy transition for many years.
From a sustainability perspective, we are focusing on four material issues that we believe infrastructure investors need to consider in portfolios:
- The lowering of emissions through more efficient use of electricity
- The role of gas as a transition tool and the emergence of hydrogen technology
- The importance of effective water and waste management by infrastructure companies
- The delivery of affordable power for consumers
Sustainability investment risks are also arising, specifically:
- Avoiding devastating technology displacement risks arising from the dramatic but uneven reduction in cost of renewables (Exhibit).
- Market valuations not fully accounting for sustainable pricing