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Global Essential Infrastructure:
Understanding the opportunity
Research and Insights

Ausbil Investment
Management Limited
ABN 26 076 316 473
AFSL 229722
Level 27225 George Street
Sydney NSW 2000
GPO Box 2525
Sydney NSW 2001
Phone 61 2 9259 0200

August 2023

Global essential infrastructure in listed markets offers investors access tosome of the highest quality, profitable infrastructure assets with comfortableleverage from around the world. Essential infrastructure offers investors
the opportunity to benefit from businesses with high barriers to entry,
significant pricing power, an innate hedge for inflation, and long stable cash
flows. Tim Humphreys, Head of Global Listed Infrastructure, talks about thecompelling investment opportunity in Essential Infrastructure.

Tim Humphreys
Head of Global Listed
Infrastructure
Phone: +61 2 9259 0281
Email: tim.humphreys@ausbil.com.au

Key points•

Listed essential infrastructure offers investors access to some of the most sought-after assets in theworld.

•

Infrastructure assets deliver secure long-term cash flows for investors, often through structures suchas multi-decade contracts or regulated revenue streams and the active avoidance of commodity anddemand risk.

•

The diversity in infrastructure means investors can access compelling underlying themes likesustainability and ESG, decarbonisation, population growth and movement, renewable energy, theelectrification-of-things and the boom in global communications.

•

Investing in infrastructure through the listed market benefits investors through superior transparency,
more flexibility and diversification.

•

The Ausbil Essential Infrastructure universe captures the ‘essence’ of what we know as infrastructure,but in listed form: the essential assets for the basic functioning of a society, such as regulated utilities(electricity, gas and water), regulated or contracted pipelines and renewables, toll roads, airports andmobile phone towers.

Jonathan Reyes
Co-Head of Global Listed
Infrastructure
Phone: +61 2 9259 0286
Email: jon.reyes@ausbil.com.au

Q: What is essential infrastructure?
TH: Essential infrastructure refers to the assets that are ‘essential’ for the basic functioning of a society.
Essential infrastructure is typically monopolistic, regulated or long-term contracted essential infrastructure
assets and companies in sectors such as regulated utilities (such as electricity, gas and water), transport(for example, toll roads and airports), energy (like regulated or contracted pipelines and renewables) andcommunications (such as mobile phone towers).

Natasha Thomas
Portfolio Manager Energy and Communications
Phone: +61 2 9259 0283
Email: natasha.thomas@ausbil.com.au

As illustrated in Figure 1, the Ausbil Essential Infrastructure Universe is defined by assets within the inner
circle of the diagram. Ausbil tightly defines Essential Infrastructure as a subset of Core infrastructure,
focusing on infrastructure assets that are strictly long-term contracted / regulated.

Paul Johnston
Portfolio Manager - Utilities
Phone: +61 2 9259 0284
Email: paul.johnston@ausbil.com.au
A New York Life Company

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Figure 1: Ausbil’s strict definition of essential infrastructure

Source: Ausbil

To put a dollar figure on the total size of this essential infrastructure universe, it covers just over 100
companies across predominantly developed markets, totalling over US$2 trillion in total market
capitalisation. This means the universe is large and very liquid such that it can absorb at least US$1bn ininvestment in just a few days. The listed essential infrastructure asset class is currently twice the size ofprivate infrastructure, including private equity approaches to infrastructure, that sits at around US$1tr ofwhich US$650bn has been deployed. Private infrastructure funds still hold around US$350bn in uncalled
equity and capacity which is yet to be deployed into the asset class. As most private investment funds
generally only get paid a management fee on cash that has been deployed, there is pressure to invest
these funds as quickly as possible, risking ‘definition creep’ in what they secure. This can mean that new
assets added to a portfolio can bring additional unwanted risks, many of which we do not believe reflect
the true characteristics of infrastructure, such as commodity risk and consumer demand risk.
Recently, infrastructure has adopted terms typically associated with private equity (Core, Core+, Core++,Value-add and Opportunistic) to describe different assets on their basic risk and return characteristics.
These categories have stuck, regardless of their suitability, and are also illustrated in Figure 1.
Moving out along the risk curve, Core+ infrastructure is defined as assets that bear some element ofmarket risk and volatility. This means that investors can be giving up safer secular growth and taking
on more volatile cyclical growth. For instance, Core+ includes infrastructure companies that have morecyclical business models with contract structures that are shorter in duration, and whilst they may have
limited barriers to entry, market competition still exists. Core+ infrastructure assets typically include
sectors such as broadcast towers, logistics, postal and unregulated utilities. Core+ infrastructure assets
are likely to include material market and demand risk which reduces the security of cashflows and, in our
opinion, moves them away from what we define as essential infrastructure.
Even further out along the risk curve is Core++ infrastructure, defined as assets with a higher associateddegree of market risk and volatility in earnings. Core++ assets have higher levels of demand risk, andsignificant user-driven economics, often without holding a monopoly or significant barriers to entry.
Core++ infrastructure can include construction, environmental services, greenfield infrastructure, energy
retailing, retirement homes, rolling stock, shipping, telecommunications and trucking sectors. Revenues
can contain significant portions of non-infrastructure generated cashflow. Any opportunistic or value-add
assets in the infrastructure space are generally considered to have a Core++ risk profile, at a minimum.
These are the broadly accepted categories of infrastructure, with the inner-most category, the Ausbil
essential infrastructure universe being an Ausbil house definition for infrastructure. However, it must
be noted that infrastructure is a non-homogeneous asset class, and there are often regular and large
exceptions to the accepted definitions, and some asset types or specific companies within an asset type
may traverse the defined boundaries.
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Q: Apart from what may seem obvious like airports and toll roads, why isinfrastructure so important and is the world building enough of it?
TH: According to McKinsey Global Institute research (2016), the world invests some US$2.5 trillion in
infrastructure a year, in sectors such as transportation, power, water and telecommunications. The problem,
according to McKinsey, is that the world needs annual investment of around US$3.3 trillion through to 2030
just to support current projected global economic growth, effectively resulting in a cumulative US$49.1 trillion
gap in infrastructure investment by 2030.
This underinvestment in a burgeoning and somewhat unstoppable demand for infrastructure, driven by
economic growth and pure population growth, has become a significant opportunity in an asset class that is
relatively young, and increasingly in focus for investors.

Q: What are the benefits of essential infrastructure assets from an investment
perspective?
TH: From an investment perspective, the key investment characteristics of classic infrastructure are typicallydescribed as being:•high barriers to entry with monopolistic characteristics,•

earnings growth and stability through the economic cycle, with less volatile cashflows,•

more stable long-term returns,•

naturally hedged for inflation, and•less correlated to equity markets.

Essential infrastructure tries to distil these characteristics into a portfolio that really expresses the mostdesirable characteristics. This means that essential infrastructure should offer a compelling mix of yield,
relative stability and long capital growth in the returns it offers investors.
Superior yieldOn the income or yield side, listed global essential infrastructure assets demonstrate strong yieldoutperformance across most periods when compared to US government bonds, and consistently offer asignificantly higher yield than global equities, as illustrated in Chart 1.

Chart 1: The relative yield of infrastructure compared to global equities

Source: Ausbil, Bloomberg

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Chart 2: The relative yield of essential infrastructure compared to 10-yr bonds

Source: Ausbil, Bloomberg

Since December 2000, listed essential infrastructure assets have generated an average yield of 3.9% pa(on a rolling basis), compared to the yield generated by global equities (MSCI World) of 2.3% pa over thesame period (Chart 1), and US 10-year treasuries of 3.2% pa (Chart 2). On average, the global essential
infrastructure yield has exceeded global equities by 1.6% pa, and treasuries by 0.7% pa.
Perhaps one other compelling observation that can be made is the variability in returns, with global essential
infrastructure offering more stable yields with lower variability as evidenced by a standard deviation in yields
of +/- 0.5%, similar to the variability in global equity yields of +/- 0.5%, but lower than the variability in 10year treasury yields of +/- 1.3%.
The yield of essential infrastructure has not only been consistently and notably higher than those of global
listed equities and US bonds, but the yield of the asset class has also been more stable, and less volatile,
an attractive characteristic for yield-dependent investors.
The unique cash-flow nature of infrastructure is such that equity investors in this sector forego someelements of growth, mostly cyclical, compared to what is on offer in global equities. However, in return,investors gain exposure to longer-term secular growth themes along with a higher relative yield. Withessential infrastructure, yields are typically backed by large, real assets that hold dominant or allowablemonopolistic positions in their respective markets’ real assets.
For most essential infrastructure assets there is little to no competition or substitution, and yields areunderpinned by long-term contracts and concessions. These are agreed with regulators, governments
and customers, and generally allow for steady increases in revenue streams to cover operating and capitalcosts, and inflation rises.
This stability in revenue and earnings is the cornerstone of essential infrastructure, and can be seen in Chart
3, which shows the year-on-year EBITDA growth for essential infrastructure companies compared to thatof global equities.

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Chart 3: Infrastructure earnings (EBITDA) growth across the cycle compared to global
equities (2000 – 2022)

Source: Ausbil, Bloomberg

One of the strong themes that can be seen in infrastructure earnings growth is that it is consistently
positive across the cycle. Chart 3 demonstrates this stability and secular growth compared to the cyclicalboom-and-bust pattern that can be seen in the earnings growth of general equities. While global equities
can enjoy periods of superior earnings growth, a lot of benefit is given away in market drawdowns or whenthe earnings cycle goes into major contraction. By contrast, the steady positive earnings growth shownin essential infrastructure compounds over the long term to significantly outperform the far more volatileearnings growth of general equities, as illustrated in Chart 4.
Chart 4: The compounding benefit of infrastructure’s steady EBITDA (earnings) growth
outperforms global equities (1999 – 2022)

Source: Ausbil, Bloomberg

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Inflation hedge
Turning to inflation, essential infrastructure should demonstrate a high degree of inflation protection,
because in a tight definition of essential infrastructure, inflation protection is one of the key characteristics.
Figure 2 illustrates the high-level of inflation protection built into the Ausbil essential infrastructure portfolio.
Some 97% of our essential infrastructure portfolio has a direct means by which to pass through inflation tousers through price adjustments. It is important to note that there can be a lag of up to 2 or 3-years before
the full impact of inflation is reflected in revenues. For example, toll roads increase their tolls based on theprevious year’s inflation number, so they do not start to get a revenue uplift until around 12-months after
inflation starts to rise. This means that companies are set to benefit over the next few years, regardless of
where inflation goes from here, as the full positive impact of recent inflation feeds through.
Figure 2: The proportion of inflation hedging by type across Ausbil’s essential infrastructure
portfolio

Source: Ausbil Global Essential Infrastructure Fund as of 30 April 2023.

At an absolute level, essential infrastructure has historically performed best under a moderate inflation
backdrop. This has been the case as the moderate inflation typically translates into healthy cashflow
growth through contracted or regulated CPI escalators (adjustment clauses in contracts that allow for
CPI to pass through the charging structure for users), whilst not causing significant changes to nominalbase yields.
By way of illustration, Figure 3 shows how essential infrastructure performs relative to global equities
across various inflation scenarios, including:
1. inflation above the Federal Reserve (Fed) Funds target range, and increasing;
2. inflation above the Fed Funds target range, but decreasing;
3. inflation below the Fed Funds target range, and decreasing; and4. inflation below the Fed Funds target range, but increasing.
What we find is that in the first two scenarios, as long as inflation is above the Fed’s target of 2%,
infrastructure has historically outperformed global equities. Under scenario three, where there areconcerns over an economic slowdown or recession and investors rush to defensive cashflows and highquality (both hallmarks of essential infrastructure), listed infrastructure outperforms. In scenario four, where
inflation has bottomed and is starting to increase (a classic cyclical turning point signal that leads investors
to sell defensives and buy cyclicals), listed infrastructure underperforms global equities. Unsurprisingly,
in scenario 4, whilst essential infrastructure has risen on an absolute basis, it still underperforms global
equities.
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Chart 5: How essential infrastructure performs versus global equities in various inflationary
environments

Source: Ausbil, Bloomberg.

Importantly, we think that active management can lead to better outcomes when managing inflation
impacts on the portfolio. Infrastructure sectors are heterogeneous, and offer the opportunity for active
allocation towards sectors that hedge well for inflation, and those that thrive in inflationary environments.
For example, transportation tends to lag in high inflationary environments as these companies typicallyhave long duration in cash flows, and relatively high gearing which makes it more sensitive to increasing
bond rates. Energy infrastructure (oil and gas pipelines), by contrast, has historically performed
strongly as high inflation leads to higher commodity prices and therefore increased exploration,
drilling and capex activity, which ultimately leads to higher volumes carried by pipeline infrastructure.
Diversification benefits
From the perspective of diversification, while the Ausbil essential infrastructure universe is highly correlated
to the general index (FTSE 50/50 Developed Core Infrastructure Index), it is significantly less correlated to
global equities (0.59), US corporate high yield (0.67) and global bonds (0.42), as shown in Figure 3.
Figure 3: Lower correlations with other asset classes

Source: Ausbil, Bloomberg Rolling 12 month correlation coefficients from 31 October 2011 to 30 April 2023. Global
Equities as MSCI World Index, US Corp High Yield as Bloomberg Barclays US Corporate High Yield, Global Bonds as
Bloomberg Barclays Global Aggregate Bond Index, FTSE Dev Core Infra 50/50 as FDCICUN Index, Ausbil Essential
Infrastructure is represented by Ausbil Essential Infrastructure universe (100 companies) back testing through31/12/2018 and Actual portfolio 31/12/2018-30/04/2023.
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Q: What differentiates Ausbil’s Global Essential Infrastructure strategy?
TH: Ausbil’s Global Essential Infrastructure strategy is a style-agnostic, high-conviction, concentrated
portfolio of high-quality global essential infrastructure stocks. Ausbil’s unique approach means that theteam only invests in companies that are ‘essential’ for the basic functioning of society and have a trackrecord of delivering the characteristics of infrastructure. This definition is much stricter than peers andassets are predominantly regulated or under long-term contracts. This proprietary and tight definition seeks
to best express the most desirable characteristics of infrastructure, namely inflation protection, downsideprotection, income and secular growth.
Quality is also a key differentiator for Ausbil. We conduct an extensive quality assessment on all of thecompanies in our universe in order to understand how their quality sits today, and how it can change,
for better or for worse in the future. Importantly, this is done through the lens of infrastructure specialists,
looking at such things as regulation and management. Quality for us is just as important as valuation, andwe think that this is an important differentiator to other managers.
As long-term investors, Ausbil assesses listed infrastructure investments as if we were acquiring the entire
company and its infrastructure assets to own them for many years. Unlike typical equity investors who lookat short-term earnings-based multiples, we evaluate the total lifecycle cashflows for each company and its
assets, and our valuations are based on the difference between our expected rate of return and the costof capital. This approach is similar to private equity and differentiated from our peers. In addition, eachcompany undergoes detailed due diligence from both a quality and ESG perspective.

Q: Do you apply ESG (Environment, Social, Governance) considerations in youressential infrastructure investing?
TH: We integrate ESG into our investment process for a number of reasons. Firstly, we believe theconsideration of forward thinking ESG factors is crucial when assessing the long-term overall sustainabilityof the types of companies and assets in which we are invested. Secondly, we believe that adding ESG
considerations vastly increases the understanding of potential risks, helping further refine our investment
thesis on companies. Thirdly, we are seeking to build portfolios with better sustainability scores given that
we believe markets will increasingly punish those with poorer ESG characteristics. Finally, ESG helps withidentifying existential issues with the future of assets, for example, those that are more impacted by events
like global warming or the secular fall in the demand for fossil fuels. In short, we believe ESG adds anirreplaceable layer of risk assessment that can improve our long-term risk-adjusted returns.
Ausbil applies ESG principles and assessments in our essential infrastructure approach, including thefollowing:•	We apply negative screens to exclude companies involved in controversial activities, including
thermal coal.
•	Quantitative analysis of E, S and G factors is undertaken in order to derive individual company
ESG scores on which we can rank our investment prospects on ESG factors.
•	We generate an industry ESG score based on each sector’s sustainability characteristics, andwhen combined with the individual company ESG scores, this derives an overall sustainability
score for each company.
•	We actively engage with portfolio company management on key ESG factors, for example,
management of indigenous affairs, formulation of climate goals, social impact, environmental
impact, in order to understand ESG-related risks and encourage improvement.
•	We take an active approach to voting the shares we are responsible for in order to improve ESG
outcomes.

Q: How does essential infrastructure perform over time?
TH: Infrastructure performs relatively well over time compared to global equities, given its defensive
characteristics combined with secular, rather than cyclical, growth. Chart 6 shows the return capture
performance for the Ausbil Essential Infrastructure strategy since inception in December 2018 compared
to global equities (MSCI World) and global listed infrastructure (FTSE Developed Core 50/50 Infrastructure
Index). While global equities delivered an average of 4.3% in up months, the FTSE 50/50 still delivered
3.1% and the essential infrastructure universe delivered 3.4%, representing an ’upside capture’ of around80%.
For us, downside protection is more important than upside capture, and pleasingly, the downside captureof essential infrastructure has been around 83% of the downside that global equities has suffered during
down months. COVID lockdowns significantly impacted global infrastructure, listed and unlisted, in 2020
and 2021, however, downside capture was still superior to that of global equities. Importantly, it is theasymmetry of the upside and downside capture that is important, and we seek to can control the downside,
and capture most of the upside in rising markets, so that over the long term we increase the potential tooutperform.

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Chart 6: Asymmetric returns, equity-like upside with half the downside

Capture ratios vs MSCI World Index, Source: Ausbil, Bloomberg, FTSE. Total Return, USD from December 2018 toJune 2023. Global Equities as represented by MSCI World Index, FTSE Dev Core Infra 50/50 as FDCICUN Index,
Ausbil Essential Infrastructure is represented by actual gross portfolio returns 31/12/2018-30/06/2023. All data is
Total Return, USD. Due to rounding the figures may not add up. Past performance is not a reliable indicator of future
performance.

Unsurprisingly, given this asymmetry of upside and downside capture, over time, the compound relative
outperformance of Ausbil’s essential infrastructure universe compared to global equities, and the FTSE
50/50 infrastructure index, shows significant outperformance for Ausbil’s Essential Infrastructure strategy
compared to the general infrastructure index, as illustrated in Chart 7.
Chart 7: Long-term compound relative performance of Essential Infrastructure

Source: Source: Ausbil, Bloomberg, FTSE. Total Return, USD from December 2018 to June 2023. Global Equities
as represented by MSCI World Index, FTSE Dev Core Infra 50/50 as FDCICUN Index, Ausbil Essential Infrastructure
is represented by actual gross portfolio returns 31/12/2018-30/06/2023. All data is Total Return, USD. Due torounding the figures may not add up. Past performance is not a reliable indicator of future performance.

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Q: What does this mean for investors?
TH: In conclusion, the main point to make on infrastructure investing is, caveat emptor, or buyer beware.
Not all infrastructure is the same. Definitions of unlisted infrastructure are being continuously stretched as
the asset class grows and higher allocations are made. As a result, index definitions crawl out along the risk
curve, and increasingly include assets that are not, by definition, essential or even core infrastructure. As wehave seen, this has significant consequences on the risk and return characteristics of a portfolio.
Our belief is that investors allocate to infrastructure in order to access a unique combination of characteristics.
This includes downside protection, inflation protection, low cyclicality, low commodity risk, lower correlations
with other asset classes, and access to long-term secular growth. These are the characteristics that we
focus on when we build our portfolio because we believe this is what investors are seeking.
In our view, it is crucial that investors seeking the true investment benefits of the infrastructure asset class lookto essential infrastructure to replicate these benefits. By having a very tight definition, only those companies
and assets that are able to demonstrate true infrastructure investment characteristics are included.
From this foundation springs the overall long-term characteristics of a basket of essential infrastructure
stocks, such as lower downside capture, lower maximum drawdown, persistent high risk-adjusted returns
and diversification benefits.

Q: What is the outlook for global essential infrastructure in 2023?
TH: As we approach the midpoint of 2023, two prominent factors continue to dominate the market
landscape: inflation and interest rates. While inflation has been gradually decreasing in most countries, it
has not been declining at the pace desired by central banks. Consequently, central banks have been raisinginterest rates in their pursuit of achieving price stability. We think inflation and interest rates will remain higher
for longer, and we do not see any interest rate cuts by the Fed until at least 2024.
Essential infrastructure is well positioned to navigate this current environment. When evaluating essential
infrastructure stocks, one of the characteristics we prioritise is cash flow protection against inflation. Thiscan be achieved through regulatory mechanisms (like with utilities), or contractual escalators (like with energy
infrastructure). Moreover, when interest rates reach their peak, it is likely to be favourable for infrastructure
assets, particularly those with longer durations that have underperformed across the rate-rising cycle.
Historical data suggests that infrastructure tends to outperform broader equities once interest rates reach
their peak because the secular growth prospects for infrastructure remain relatively stable in a high interest
rate environment. This consistent growth trajectory is a significant advantage of essential infrastructure,making it an appealing investment choice in the years to come when compared to other sectors. It istherefore unsurprising to hear that a lot of investors that we talk to are revising upwards their allocations tolisted infrastructure to around 10%, and even 15% in some cases.

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Contact Us

Institutional

WholesaleMark Knight
Chief Executive Officer
Phone 61 2 9259 0226
Emailmark.knight@ausbil.com.au

Hik Chadirchi
National Manager, Wholesale Clients
Phone 0424 160 728
Emailhik.chadirchi@ausbil.com.au

Fawaz Rashid
Research Manager, State Distribution Manager
NSW, Wholesale
Phone 0401 830 483
Emailfawaz.rashid@ausbil.com.au

Rebecca Morgan
Key Account Manager, VIC & SA, Wholesale Clients
Phone 0407 917 661
Emailrebecca.morgan@ausbil.com.au

Andrea McGarryBusiness Development Manager, QLD & NT,
Wholesale Clients
Phone 0411 465 426
Emailandrea.mcgarry@ausbil.com.au
Dimitri Giannaras
Business Development Manager, NSW & ACT,
Wholesale Clients
Phone 0431 576 815
Emaildimitri.giannaras@ausbil.com.au
Marko Matosevic
Business Development Manager, VIC, TAS & WA,
Wholesale Clients
Phone 0431 340 553
Emailmarko.matosevic@ausbil.com.au
William Orr
Business Development Manager NSW, Wholesale
Clients
Phone 0402 620 188
Emailwilliam.orr@ausbil.com.au

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Ausbil Australian Active Equity Fund (ARSN 089 996 127), Ausbil Australian
Geared Equity Fund (ARSN 124 196 407), Ausbil Australian Emerging
Leaders Fund (ARSN 089 995 442), Ausbil MicroCap Fund (ARSN 130 664872), Ausbil Australian SmallCap Fund (ARSN 630 022 909), Ausbil Balanced
Fund (ARSN 089 996 949), Ausbil Active Dividend Income Fund (ARSN 621
670 120), Ausbil Australian Concentrated Equity Fund (ARSN 622 627 696),
Ausbil Active Sustainable Equity Fund (ARSN 623 141 784), Ausbil Global
SmallCap Fund (ARSN 623 619 625), Candriam Sustainable Global Equity
Fund (ARSN 111 733 898), Ausbil 130/30 Focus Fund (ARSN 124 196 621),

Ausbil Investment
Management Limited
Level 27225 George Street
Sydney NSW 2000
Australia
Toll Free 1800 287 245

Contactus@
ausbil.com.au

Ausbil Long Short Focus Fund (ARSN 642 635 498), Ausbil Global Essential
Infrastructure Fund (ARSN 628 816 151) and Ausbil Global Resources Fund
(ARSN 623 619 590) (collectively known as ‘the Funds’). The information
provided is factual only and does not constitute financial product advice.
It does not take account of your individual objectives, financial situation orneeds. Before you make any decision about whether to invest in a financial
product, you should obtain and consider the Product Disclosure Statementof the financial product and the target market determination which isavailable at https://www.ausbil.com.au/invest-with-us/design-anddistribution-obligations/fund-tmds before acquiring or investing in thefund.