Infrastructure companies rushing slowly through the investment portfolio

Historically, infrastructure company stocks have been among the most stable on the stock market. Their distinct risk profile has offered investors significant diversification benefits without substantially compromising the overall long-term equity market returns.

The stability of listed infrastructure companies is primarily based on the fact that many of these businesses—though not all—are subject to public regulation and therefore not exposed to normal market competition. Regulation enables businesses operating as monopolies to achieve competitive returns, as they must be allowed to generate sufficient profits to invest for the long term in order to maintain the level of service defined by public authorities. Over the long term, the profitability of regulated businesses can be seen as moving within a “pipeline,” where the lower bound is defined as described above, and on the other hand, excessive returns are capped by regulatory changes imposed by public authorities.

Other Special Characteristics of Infrastructure Businesses

Infrastructure businesses typically require large initial capital investments, but ongoing maintenance investments tend to be moderate. As a result, these companies often generate strong cash flow, which in turn supports their ability to pay attractive dividends.

Economic cycles tend to have only a limited impact on many types of infrastructure businesses. Good examples include water and electricity distribution, which typically experience stable demand regardless of economic conditions.

From an investor’s perspective, regulation offers another key advantage: infrastructure companies often have the right to adjust tariffs or service fees in line with inflation. This provides a natural inflation hedge for infrastructure investments.

How the Unique Characteristics of Infrastructure Companies Are Reflected in Listed Stocks

First of all, investors can more easily anticipate the earnings development of infrastructure companies, which is driven partly by regulation and partly by the inherently stable nature of their operations. As a result, the valuations of these companies tend to fluctuate less than the broader market, and they are less prone to the kinds of overvaluations often seen in rapidly growing sectors. Therefore, infrastructure stocks are rarely purchased at significantly overinflated prices. This is one of the key reasons why portfolios invested in infrastructure companies have delivered competitive returns over the long term.

Strong dividend-paying capacity serves as an anchor for the value development of listed infrastructure companies, and their dividend yields are often above the market average. Many infrastructure firms are considered “dividend aristocrats”—companies with an especially long track record of steadily increasing dividend payouts to their shareholders.

What Are the Main Risks for Infrastructure Companies?

A key risk specific to infrastructure businesses is the political risk related to regulation. Over the past 15 years or so, we have witnessed some instances where this risk has materialized—typically when a government has made significant regulatory changes in a specific country and industry, for various reasons. While minor regulatory adjustments happen regularly, major sudden changes tend to be isolated, affecting only a particular industry in a particular country at a time.

The long-term history of the sector also includes broader global crises such as the COVID-19 pandemic and the war in Ukraine. The pandemic hit one sector especially hard: companies providing airport services. Their share prices fell by tens of percent in a short period. The war in Ukraine, on the other hand, had a significant impact on, for example, European natural gas distribution companies.

Among general market risks, one of the most significant is rapid and substantial changes in interest rates. Interest rates have a dual effect on many infrastructure companies. Firstly, because these companies typically offer above-average dividend yields, their attractiveness to investors tends to decrease when interest rates rise sharply. Conversely, their appeal increases as interest rates fall. Secondly, many infrastructure firms carry relatively high levels of debt on their balance sheets. As market interest rates rise, their interest expenses gradually increase, which can eventually impact dividends payouts. The opposite effect occurs when rates decline.

Although infrastructure-related sectors tend to be operationally strong and often operate in relatively protected environments, there are no guarantees that the management of such companies will always succeed. Failures do occur from time to time. Most often, these involve companies overextending themselves relative to their size—either through overly aggressive investment or by acquiring a company in a new industry or geographic market where they lack sufficient expertise.

Promoting Sustainability Is a Key Objective in Infrastructure Funds

UB's funds that invest in listed infrastructure companies have in recent years placed strong emphasis on improving their sustainability. This has been especially evident in the case of UB Infra, which focuses on developed markets and has risen into the top 10% of its Morningstar peer group. A key factor in this progress has been the reduction of the carbon footprint of its investments.

The fund has primarily targeted industry-leading companies in terms of greenhouse gas emissions, as well as those that have made significant advances in adopting renewable energy. In other sectors, too, the fund has aimed to select companies that have successfully reduced their greenhouse gas emissions.

Outlook for Listed Infrastructure Stocks

Most of the companies held in our funds grow moderately, in line with GDP growth. However, there are also long-term structural drivers that support growth slightly above this baseline. The most significant of these is urbanization. While especially relevant for emerging markets, urbanization still plays a role in developed markets as well. Another, more recent structural growth driver is the so-called green transition, particularly within the most important industrial sector of the infrastructure space—electricity generation. The general electrification of society, along with the rapid expansion of energy-intensive data centers, has fundamentally reshaped the long-term growth outlook for the sector.

UB Infra and UB EM Infra Funds Perform Well in Peer Comparisons

UB manages two mutual funds that invest in listed infrastructure companies: UB Infra and UB EM Infra. Both funds have performed well relative to their international peer groups. Their competitive returns are the result of a long-term, disciplined investment strategy, built around four key pillars:

a) a focus on regulated infrastructure businesses
b) investments in monopolistic or low-competition sectors, such as airport services and ports
c) broad diversification, effectively reducing both company-specific and broader political risks
d) proactive portfolio adjustments to increasingly incorporate sustainability factors, which have become critical to long-term performance

The information presented is based on United Bankers´ own estimates and sources considered reliable by United Bankers. The information on which the conclusions are based may change quickly and United Bankers may revise its market view without prior notice. No information obtained through this presentation should be construed as a solicitation to invest. When making investment decisions, investors should base their decisions on their own assessment of any investment object as well as the associated risk and take into account their own objectives and financial situation. 

Fund investments always involve financial risk. The value of the investment made in the fund may increase or decrease and investor may lose part or all of the invested capital. Historical performance is not a guarantee of future returns and it cannot be used to predict future returns of the fund. Before making any investment decisions investors shall get acquainted with the fund’s key information document, fund prospectus, fund rules and price information that are available on each fund’s webpage. The funds are managed by UB Fund Management Ltd. The portfolio management of the funds is outsourced to UB Asset Management Ltd.