Property & Infrastructure Funds Infrastructure as an Asset Class

I have a reasonable allocation to infrastructure. I expect distributions broadly for the class to grow in line with global growth (although no guarantees).

I think the "yield trap" stuff that gets a lot of ink here is probably a bit of a beat up. A high yield that never grows or is unsustainable is problematic but the choice between "slow growing highish yield" and "somewhat faster growing lowish yield" is personal in my opinion.

I've always been more drawn to higher yield/lower growth expectations personally.

 

I agree with the potential for the trap. Whether or not that occurs in future performance/years is of course ... anybody's best guess.

Ultimately wealth and greater yield overtime are created from holding more of the CSL's of the world and less of the "insert any industrial/commercial/retail property landlord". There is certainly however not just an increased initial yield but also an increased frequency of the distribution of the income from REIT and infrastructure equity. If you are using that more frequent income to reinvest into a portfolio at more frequent intervals I believe it helps a small amount to smooth overall volatility in most time periods.

Ultimately the inclusion of dedicated portfolio weights to things like infra or REITS is not a decision necessarily made to maximise total wealth.

Just to confirm, I do not and have never overweighted AREITS... for me there is already plenty of that in the index. The overweight in my partners portfolio is to GREITS.

 

Because a larger part of infrastructure return comes from annual income payments. You don't want this yield difference between infrastructure and broad equity overwhelmed by short term currency volatility if you either wish to consume the yield or rebalance your portfolio with it.

 

The headspace of an income investor is typically “give me the income, I don’t want to realise capital”.

But the trouble with hedging is that it can really mess up distribution frequency and consistency. Take Vanguards Infrastructure Funds, unhedged and hedged, and note the difference in distributions (or lack of in the “hedged” version):

UNHEDGED:



HEDGED:

 

Off topic but does that include the likes of DJW around NTA? Or does that come under the no growth category?

 

I have to admit that over time after seeing evidence other than PT’s charts that it looks that way. As posted earlier PT’s charts have AReits looking like a disaster but in the charts I’ve produced myself AReits look to have done quite ok.

 

As part of the hedging return is accounted through the P&L and part is directed to equity through the Balance sheet, just looking at the distributions does not give the full picture.


Portfolio A is the Vanguard unhedged Infrastructure fund you refer to and portfolio B is the hedged version. In both cases all distributions have been re-invested.



Big picture – you have been better off hedging global infrastructure long term in the past – my fundamental understanding (I dunno much so understanding could be faulty) is that you should be better off hedging long term in the future.


If you focus only on the distributions – ie what’s happening through the P&L you may miss what’s happening in the balance sheet. It’s a bit of the age old income vs total return mind set.

 

Yes I understand what you detailed but as you say it depends on the mindset of the investor.

 

Never interested me to be honest.

 

Just on this chart... because I understand its maybe being used by this Mr PT (who I understand is a professional or educator).. i'll have a go at it...

The only way this projection is remotely accurate is if the income distributed from the REITs is not reinvested at all... i'll let you make up your own mind on what that means in terms of comparing the outcomes.

 

Attached is PTs chart of property and industrials with income reinvested.

The result ends up similar to the All Ords vs industrials chart that’s often published which is pretty reasonable.

 

But this is what I’ve struggled with. My chart below relatively long term (26 years) has Industrials vs AReits looking far more favourable than PT’s Chart. Chart start dates make all the difference:

 

Yeah I agree makes a huge difference. Although people always question what the older chart would look like including income, so just throwing it in there for people to see.

Another thing to note though is that as time goes on, even small differences in performance end up making a larger and larger impact at the end, which aids the older chart further.

I'm not anti REITs, in fact we own a few separately in our portfolio. Don't tell PT

 

Vanguards latest index

Vanguards

Thanks Snowball,

I understand the Australian market weight index has a few problems (not strongly diversified across sectors etc).

My problem is I genuinely struggle to think of a low cost, diversified way to invest broadly in industrial equities that has returned anywhere close to that projected benchmark. Especially when.. how exactly is one investing in that industrial benchmark is very important. My understanding is the projection is demonstrating outperformance of industrials compared to total market weight (not just REIT). But there is to my mind no actual investmemt vehicle that has achieved it that performance?

If I go to Vanguards lovely charts.. found here

Where will your goals take you?

The differences between market and REITS in Aus certainly do not appear wide.

Obviously on that Vanguard chart total wealth in the last 3 decades would have been maximised by having strong US equity exposure. But I'm certainly not going to use that as a basis for further tilting US. The folks at Platinum have pointed out that the US equity premium vs rest of world is the highest its ever been in Platinums history (albeit only 25ish years).

 

There actually is if you wanted it...

The LIC Whitefield is more or less a broad industrial index. It includes everything except resources, REITs are included. And it’s been running for decades with returns matching the industrial index.

Home

MER is higher than the other LICs at 0.40% per annum.

Going back a few decades the old LICs used to comfortably outperform the All Ords and they invest mostly in industrial companies, so I’d bet they were all similar performance to Whitefield and the industrial index.

Nowadays it’s a lot harder obviously and returns are more in line with the index over the last decade but they do still focus on industrial companies. REITs and resources are in there but usually less than market weight.

Future is unknown as always!

 

Thankyou for the infortmation re Whitefield snowball. I'll follow up and review it and give it proper consideration. It's honestly not an LIC I have properly investigated before. I have tended to ignore LIC's that have smaller asset bases.. and thus the only non ARG or AFI LIC I have properly considered and invested in is QVE as I like the manager and have faith they will do exactly whats written on the tin.

One thing i have noticed with a quick casual glance at Whitefield is that there has been no increase in dividends in a decade... which seems somewhat contradictory to the stated power of an industrial index's capability of providing a growing income stream in comparison to REITS and thr broader market.

 

There have been many discussions about WHF. Some likei t, some don't. You may wish to look at it's EPS from around the time of the GFC and compare that with the dividends over that period. It does seem the dividends were constant as a consequence of it using reserves to maintain it for quite a while.

 

If you look at the industrial chart it shows dividends are only just a bit above ten years ago.



They took a hit during GFC and have been growing since. WHF decided not to cut dividends and have begun increasing again as of last year with another 12% increase forecast for the coming year.

Dividends for most other LICs are only a bit higher than the GFC peak so WHF is not bad in comparison.

Looking at dividends for the industrial index and the LICs on a long term trend basis they’re all somewhat similar.

Some LICs may just have a number of flat years rather than dropping and then growing again.

I’d guess most shareholders would appreciate the stable flow of dividends rather than a cut.

 

Was briefly rereading this IFRA (Global Infrastructure Hedged) ETF related doc. I haven’t really looked at infrastructure in great detail and assumed the index used by IFRA was more specific to their mandate. But after having a bit of a look around today the FTSE Developed Core Infrastructure 50/50 index appears to be getting popular as the benchmark used by many industry participants including asset consultants / managers.

https://www.vaneck.com.au/investing-in-global-infrastructure/

This also in relation to distribution smoothing of hedged returns (TOFA election) which was posted elsewhere but more relevant to here:

Do you like your income smooth or crunchy?

The ETF being relatively new (listed May 2016) appears to be getting decent investor support with over $100 mil FUM to date:

https://www.vaneck.com.au/library/vaneck-vectors-etfs/IFRA-fact-sheet.pdf

PS: Not sure how this thread ended up under Cash and TDs.

 

The role of infrastructure in a portfolio

https://heathcoteinvestment.com/wp-...nfrastructure-Research_The-role-of-inf....pdf