Showcase: A sharp lens on global infrastructure

Ask any financial adviser what they look for in a fund manager and they'll likely name three traits: proven expertise, product endurance and institutional edge.

Those qualities may not have mattered as much during extended periods of market growth, but they become non-negotiable when inflationary pressures persist, eating into income and returns.

It's in this environment that Peter Meany, head of global listed infrastructure at First Sentier Investors, argues that a fresh take on a classic investment concept could be exactly what the market is starting to value.

More structural shifts ahead 

As the saying goes, time in the market beats timing the market. Today, infrastructure is in a rare position to harness both.

"Infrastructure investing has always been important to have in a portfolio, but right now we're seeing unprecedented growth coming through the sector from things like the energy transition, digitalisation and urban congestion," he says. "Infrastructure solves a lot of those long-term problems."

What was evident 30 years ago as the sector's key attraction has been validated again in the face of rising interest rates.

"The income is inflation-hedged, and the strong underlying structural growth drivers we're seeing are coming through infrastructure portfolios as regular and contracted earning streams."

Conversely, technology companies are dominating the top indices, meaning a shrewd investor needs to ensure their portfolio is diversified.

"The growth markets have done very well, but investors are feeling a bit uncertain at the moment and are considering a defensive strategy." Infrastructure could be a good complement if the technology sector goes through a down market in the future, he says.

Correcting outdated perceptions 

In a 2021 interview, Meany identified electric vehicles (EVs) and the electrification of the automobile sector as a structural shift that could deliver a new source of returns to investors.

He's applying that same rationale to forecast how "boring utilities" may in fact become cutting-edge businesses as they adapt to offer renewable energy.

"What people are missing at the moment is just how enormous the challenge is of solving some of these renewable-energy transition issues and the amount of investment that needs to take place."

"And with that investment, you're growing the asset base of infrastructure, which ultimately, in a regulated business model, leads to greater earnings growth."

For example, electricity providers will need to upgrade their asset base to reduce their carbon footprint or provide renewable energy. With more EVs on the road and the growing use of internet and AI in most households, electricity providers around the world will need to improve their operations, which, as Meany says, could completely transform their earnings profile.

"In some cases, we've got big, boring utilities growing at 10% per annum, so they're starting to deliver more growth, which I think, over time, will also make them less interest-rate-sensitive than they've been in the past."

The 'pay-their-own-way' model 

What truly defines 2026 as a milestone year is the emergence of a hybrid business model responding to the huge challenge Meany describes.

Over the next decade, the number one constraint for data centres is the unprecedented demand for power.

"Utilities are helping solve that problem through investments in new generators, particularly renewables, battery storage, transmission lines and upgraded substations."

"All of that is required to deliver these power solutions for the future, and large tech companies are willing to pay their own way. They're willing to make commitments over the long term - we're talking 10, 15 and 20-year contracts - to make sure that this power is available."

"That means utilities are making very significant investments, but in a low-risk way because it's contracted and regulated in nature."

The lifestyle premium 

Market commentators are currently divided on the likely number and size of data centres in the future, but there is one thing many agree on: the generational shifts in lifestyle spending.

"Younger generations want more experiences, particularly post-pandemic, while older generations have a significant amount of wealth and perhaps want to spend some of that instead of just handing it to the kids," says Meany.

Both trends are driving an enormous amount of travel around the world. Add to that the "new middle wealth" emerging from India, Africa and Latin America. "When their wealth increases, they tend to travel as well."

Beyond airport travel driving a surge in development and infrastructure, urban congestion is a major issue.

"Every city in the world is struggling with road capacity, and we've seen when that infrastructure is built and built well just what a difference it makes in terms of moving people and moving goods around cities."

Meany witnesses this firsthand because First Sentier Investors makes it a point to visit companies and businesses throughout the year.

"We pride ourselves on getting out and meeting companies face-to-face. It's the best way to understand the culture of a business."

An inflation hedge 

The stakes are high with tangible assets like airports, toll roads and power plants. In a world of deepfakes, in-person visits are critical for projects large or small.

"One-on-one meetings allow us to dive a little bit deeper. Let's say, for a large US utility, we can ask: What's the exact timing of the closure of their coal-fired power plant? What are they going to replace it with, in terms of wind, solar and batteries? Do they have the regulatory approvals to get that done in a reasonable timeframe?"

Because the strategy's portfolio is global in scope, Meany says it's easier to make business comparisons.

"Take airport development. A business might say, 'Here's an old terminal that's yet to be redeveloped. It has low ceilings, and limited retail and food offerings. But here's a new terminal we've developed, and look at the 60% uplift in spending we've achieved post-retail development.'

"Well, if that can play out in their other three terminals, and if I can take that knowledge in Zurich and apply it to our airport exposures in Mexico, then all of a sudden we start to see world's-best practice. It brings the spreadsheets to life."

Asked why infrastructure investing matters not just to the big end of town but mum-and-dad investors, he says, "One of the great things about infrastructure is that it's tangible. You don't need to explain to people how an airport makes money or how a toll road makes money or how a water utility makes money because you use them every day."

Even better, companies are also held accountable to deliver on their social licence to operate, which means both the community and the investor can have a direct impact on how these businesses run.

"That's the great thing about infrastructure: it's real, and the income offers inflation-hedging, which is clearly important at this point in the cycle.

Brought to you by First Sentier Investors.