FOR WHOM THE ROAD TOLLS, article from the AGE, Melbourne, Au.
- FOR WHOM THE ROAD TOLLS
by John Collett
April 22, 2009
As investments, infrastructure monopolies such as toll roads and airports are usually safe bets. But, as we now know, it is how they are financed that can make them risky.
Until the global financial crisis hit it was up, up, up for infrastructure stocks. Governments couldn't offload public assets such as airports, ports and electricity suppliers fast enough. Not that long ago these were considered too important to let out of government ownership and too unprofitable to be of interest to the private sector.
But the economic orthodoxy says smaller government is good and that the private sector can build and operate infrastructure more efficiently.
It was a global trend some funds managers were only too happy to exploit. They began offering managed funds that invest in infrastructure stocks listed in Australia and overseas. Macquarie was the first to move and is the biggest player, with other managers rolling out infrastructure funds in more recent years.
An attraction of infrastructure for investors is its defensive characteristics. While the yield on it over the longer term is greater than for long-dated government bonds, investments were said to be almost as safe as government bonds. The global financial crisis has been the perfect opportunity to test those claims.
It is true most global listed infrastructure funds did better last year than share funds or global property funds but the double-digit losses will still have shaken the faith of those who thought the sector would hold up better in a downturn. As sharemarkets collapsed during 2008, unit holders expected the funds to hold up better than they did. The funds recently reviewed by Morningstar each lost a lot of value. To be fair to the infrastructure fund managers, investors were fleeing sharemarkets and anything listed was hammered. But these assets have steady earnings and cash flows such as toll roads with government-regulated levies adjusted for inflation and weak or no competition. So why have their prices fallen by so much? The answer is debt. Infrastructure companies, that is the stocks not the managed funds that invest in the stocks, would often borrow to boost shareholder returns.
Morningstar says that before last year, when money was cheap, some infrastructure companies geared aggressively. "Some also designed fiendishly complicated capital structures and investors struggled to comprehend that degree of financial risk." In other words, the asset the toll road, airport or whatever was a relatively low-risk investment proposition but the risk was added because of the financing of the balance sheet.
"These funds are growth investments, not defensive investments, in our view," says Tim Murphy, a senior research analyst at Morningstar. While the infrastructure assets are conservative, the listed infrastructure companies that hold the assets may have gearing levels that aren't conservative.
Aggressive gearing and complexity helped to bring unstuck all sorts of listed companies such as Allco, Babcock & Brown and ABC Learning. They were the highly indebted and too-clever-by-half companies that came a cropper when the credit crunch came along.
The index manager, Vanguard, did relatively better than the other infrastructure funds during 2008. That was because although it manages the fund broadly around the index, it adjusts the portfolio to favour stocks with higher yield and under-invests in stocks with high gearing. Infrastructure is regarded as a yield investment.
Murphy says most of the infrastructure funds have not paid distributions or much by way of distributions during the past six months. The funds invest mostly in infrastructure stocks listed on overseas sharemarkets and the foreign currency exposure has been hedged. The Australian dollar has been weaker against most major currencies since the middle of last year. Murphy says the distributions that would have been paid to unit holders have been used to help pay for hedging.