Infrastructure’s defensive role under scrutiny

Infrastructure’s defensive role in investors’ portfolios is being put to the test by the COVID-19 crisis. Some sectors have been hard hit, with airports, seaports and some toll roads experiencing the biggest impact.

Companies involved in midstream assets that transport energy, a mainstay of many energy and some infrastructure funds, also are being hurt by plummeting oil prices. EDHECinfra’s Unlisted Road index dropped 13.67% for in the first quarter, while its Unlisted Airport index was down 10.16%.

EDHECinfra, an EDHEC Business School venture, provides global infrastructure indexes and research. However, other infrastructure sectors, including telecommunications and digital as well as renewable energy, are expected to be more resilient.

Core infrastructure generally is designed to be defensive, with resilient and solid downside protection, said Lisa Bacon, San Diego-based principal, private markets consultant and infrastructure program lead at consulting firm Meketa Investment Group. Value-added and opportunistic infrastructure investments are less defensive.

Ms. Bacon said most of her clients’ portfolios contain infrastructure equity and very little infrastructure credit. Some infrastructure equity investors are also looking to infrastructure as an inflation hedge.

“What we are experiencing right now is an almost unimaginable economic shutdown across the globe," Ms. Bacon said.

Some sectors have been hard hit, with airports, seaports and some toll roads experiencing the biggest impact. Companies involved in midstream assets that transport energy, a mainstay of many energy and some infrastructure funds, also are being hurt by plummeting oil prices.

EDHECinfra's Unlisted Road index dropped 13.67% for in the first quarter, while its Unlisted Airport index was down 10.16%. EDHECinfra, an EDHEC Business School venture, provides global infrastructure indexes and research.

However, other infrastructure sectors, including telecommunications and digital as well as renewable energy, are expected to be more resilient.

Core infrastructure generally is designed to be defensive, with resilient and solid downside protection, said Lisa Bacon, San Diego-based principal, private markets consultant and infrastructure program lead at consulting firm Meketa Investment Group. Value-added and opportunistic infrastructure investments are less defensive.

Ms. Bacon said most of her clients' portfolios contain infrastructure equity and very little infrastructure credit. Some infrastructure equity investors are also looking to infrastructure as an inflation hedge.

"What we are experiencing right now is an almost unimaginable economic shutdown across the globe," Ms. Bacon said.

The crisis is turning into an "academic test of the resiliency of infrastructure," she added. "We're seeing most things hold up as we would expect."

Already, some asset owners and infrastructure managers have taken write-downs. IFM Investors, a Melbourne-based investor-owned infrastructure manager, wrote down some of its assets by about 8%, said a spokeswoman in a written response to questions.

IFM values its portfolio on a quarterly basis, she said.

"Prior to the end of the March quarter, IFM Investors responded to material changes in operating and market conditions for our assets as a result of the COVID-19 pandemic by applying an out-of-cycle revaluation to certain assets in our global and Australian portfolios," she said.

IFM wrote down its airport, seaport and toll road assets, which have been significantly affected by travel restrictions and community lockdowns, she said.

Airports were the most disrupted by the pandemic, with seaports affected to a lesser extent because the virus-related restrictions have more to do with the movement of people than freight, she said.

"Our (public-private partnership) assets, including rail stations and schools, have been resilient given they need to remain open and are backed by government availability payments which provide a steady income stream," the spokeswoman said.

For the California Public Employees' Retirement System, it's too early to tell how its infrastructure assets are being affected by the COVID-19 crisis, Stephen P. McCourt, managing principal of Meketa Investment Group, told the investment committee at its April 20 meeting. The $375.7 billion Sacramento-based fund had its infrastructure investments valued at $6.4 billion as of Sept. 30.

Mr. McCourt said he expects to see first-quarter infrastructure returns to be -5% to -10%. But the bulk of the impact won't appear until possibly the third quarter, he added. The vast majority of CalPERS' infrastructure portfolio, 83%, is invested in core assets, which are intended to be more defensive than value-added or opportunistic, he noted.

Transportation assets are expected to be most affected by the lockdown.

CalPERS owns a 9.99% stake in London-area Gatwick Airport, London, down from a 12.7% stake when pension plan invested about $155 million in 2010.

Last year, CalPERS transferred the investment to a separate account from a direct investment after manager Global Infrastructure Partners and co-investors sold a 50.01% interest in Gatwick to VINCI SA for £2.9 billion ($3.6 billion), a Meketa memo to the investment committee said. GIP is managing the other 49.99%, including CalPERS' stake.

The COVID-19 crisis has hit Gatwick, with passenger traffic down 22.5% in the first quarter, VINCI reported on April 15.

Asset owners continue to invest in the asset class. In April, the $13.3 billion New Mexico Educational Retirement Board, Santa Fe, committed $50 million to the latest fund of Stonepeak Infrastructure Partners, one of its existing managers. Like CalPERS, the New Mexico fund invests in infrastructure for diversification and as an inflation hedge, said CIO Bob Jacksha in an email. Stonepeak has been a "long term, solid manager for us," he said. The board might consider an add-on investment to an infrastructure fund as early as May, he added.

Currently, the pension plan's infrastructure portfolio has minimal exposure to toll roads and airports, he said. David Lebovitz, New York-based executive director and a global market strategist at J.P. Morgan Asset Management, said that in the wake of the 2008 global financial crisis, even relatively lower-risk infrastructure assets such as utilities were marked down.

"Low-, middle- and high-risk assets all took hits in asset value in the GFC," he said. "It was a question of magnitude."

However, many invest in the asset class for the income, which should continue in the short to medium term due to the need for infrastructure assets around the world, Mr. Lebovitz said.

"I'm not Pollyanna-ish; in the short term we will still see some pain," he said, especially in seaports, airports and trade terminals.

Highly regulated assets such as energy transmission and infrastructure assets with contracts in place should be somewhere in the middle. For those assets it is less about their sensitivity to the business cycle and more about the counterparty's ability to continue to pay, Mr. Lebovitz said.

"The longer the economic shutdown ... the uglier this whole thing begins to look and the more vulnerable the assets and strategies become," he said.

The base case is that the majority of the drawdown will occur in the second quarter, he said. However, if there is a second wave of infection or the labor market doesn't prove to be as resilient as anticipated, it will take the economy longer to recover, impacting infrastructure further, Mr. Lebovitz said.

"I think the need for infrastructure investment is not going away despite what is going on," he said. "It's an asset class in which investors are underallocated. ... I see pretty significant room for growth."

Infrastructure's defensive role under scrutiny