European Infrastructure Funding: After the Crisis – Part 2

• Dr. Jan-Carl Plagge, Head of Applied Research
  

The first part of this article series reviewed the large bill that European countries face as they expand and upgrade infrastructure networks. This presents an opportunity for investors attracted to the stable cash flows and income characteristic of the asset class. 

Listed infrastructure investments are an alternative for many pension funds and insurers who can’t invest directly in real assets due to their complexity and illiquidity. In a March PULSE ONLINE article, Rod Jones, Head of North America, and Dr. Jan-Carl Plagge, Head of Applied Research at STOXX Ltd., reported on the benefits of investing in publicly traded infrastructure equities.

A broad and thorough definition of infrastructure

For investor seeking global, well-diversified and liquid exposure to the asset class, the STOXX® Global Broad Infrastructure Index is an option at hand. The index is made up of 151 public companies from developed and emerging nations and takes a broad definition that includes all sectors that are vital to the development of the economy. The benchmark consists of five infrastructure supersectors and 17 subsectors, and caps the maximum weight of represented supersectors and countries to avoid concentration. 

European operators and businesses account for almost a quarter of the STOXX Global Broad Infrastructure Index. By investing in these businesses, part of the capital finds its way through to emerging assets as listed companies execute acquisitions and participate in public-private partnerships to build new assets.

A report1 produced by STOXX’s research team has highlighted some of the financial benefits of having infrastructure exposure in institutional portfolios:

• Defensive benefit: in the past decade, the STOXX Infrastructure Index’s annualized volatility has been over 2 percentage points lower than that of the broader market.
• Dividend benefit: the average payout ratio (dividends per share divided by earnings per share) for infrastructure companies was 18.6 percentage points higher than for the rest of companies.
• Diversification benefit: theinfrastructure index’s average beta to the broad market was 0.78. This means that infrastructure companies reacted less sensitively to changes in the market (beta of 1), although the investment performance was equivalent.

The STOXX Infrastructure Index serves as the underlying for the FlexShares STOXX Global Broad Infrastructure Fund, which trades in New York.

The STOXX® Global Infrastructure Select 30 Index is another option. The benchmark selects 30 low-volatility and high-dividend stocks from a pool of infrastructure companies, therefore reinforcing the stability and income profile of the asset class.

A re-launch of Europe’s infrastructure

The infrastructure industry is itself undergoing transformational trends. They include the emergence of new services (such as industrial waste, new renewable energy sources), and the growth of private investors’ interest in greenfield (built from scratch) investments. Lastly, as interest rates remain low, projects are increasingly luring new institutional capital comfortable with financing deals through lending.

With more capital available from both the private and the public spheres, Europe’s infrastructure may be set for a new impulse.

 

Featured indices

STOXX® Global Broad Infrastructure Index

STOXX® Global Infrastructure Select 30 Index

 

1 “Realizing the Promise of Listed Infrastructure Investments,” STOXX, March 2017.

 

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