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CBRE GLOBAL INVESTORS

CBRE Global Investors, combined with CBRE Clarion Securities and CBRE Caledon, is one of the world’s leading real asset investment managers providing real estate and infrastructure investment solutions to over 500 clients worldwide.

CBRE GROUP

CBRE Global Investors is the investment management division of CBRE Group, Inc. the world’s premier commercial real estate services and investment firm.  The company’s shares trade on the New York Stock Exchange under the symbol “CBRE.”

REAL ESTATE SERVICES
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Hinds Howard

Principal, Associate Portfolio Manager, Infrastructure

Infrastructure Delivers

You might remember last year when I wrote a few mid-week posts on global listed infrastructure topics.  I explained back then: in exchange for the weekly posts that we publish free of charge, you might have to endure some posts about listed infrastructure, a topic you likely did not come to “MLPguy” to hear about.  Last year, we highlighted that investors should be looking at listed infrastructure as a better alternative to MLP allocations.  As with last year, ignore this message at your own peril, based on results we share below. 

We have many readers of the blog who are decision makers at consulting firms and pension funds and endowments.  This message is mostly directed towards institutional investors, but it can also apply to individual investors. 

The message is simple:

  • MLPs have bounced 10%+ off the early December 2019 multi-year low and are enjoying a seasonal respite from fund outflows.
  • Without the stress of daily extreme volatility and angst, now is an ideal time to re-evaluate midstream exposure and consider (or re-consider) listed infrastructure.
    • Midstream volatility is likely to continue, the upswing we are on today could end up leading to another painful downswing.
    • Infrastructure includes midstream, so choosing infrastructure doesn’t mean you are giving up on midstream.
  • Global listed infrastructure is a reasonable alternative that many investors are choosing to fill the role originally intended for their MLP allocations.
    • Infrastructure has consistently outperformed midstream over the last 1, 3, 5 and 10 years and has reliably grown income over that time period, in contrast to midstream.
    • Infrastructure has done a better job of keeping pace with broader equities, but with far lower volatility than MLPs and the S&P 500.
    • Lower volatility is driven by monopoly characteristics and regulated nature of the assets that produce consistent cash flows.
    • Money is in motion, and funds should continue to migrate from legacy MLP allocations to infrastructure and other real assets categories.

Infrastructure: Consistent Performance

The chart below compares annual gross total returns of infrastructure to the various midstream indexes.  Over the long-term, infrastructure has provided a consistent, positive return you look for when allocating to income-producing real assets.

Infrastructure has dramatically outperformed midstream over 10 years, but it has underperformed the S&P 500.  Infrastructure’s return is driven by the current income plus income growth that the asset class delivers due to reinvestment.  In fact, dividend growth over the last 20 years has been a compounded 7% while the dividend yield has been about 3.5%.  Unsurprisingly adding the two together is the long-term return!  The return has not been driven by multiple expansion, which may surprise you.  In fact, multiples remain well below those in the private market which signals a wide valuation discount in the listed market relative to private market valuations, which my colleague Dan Foley recently wrote about

We could be accused of some bias, because we do manage a global listed infrastructure strategy, but we also believe the future is very bright for global listed infrastructure.  Exciting things are happening across infrastructure, including several secular growth themes.  It is a sensible replacement for what you hoped for when you invested in midstream.

Infrastructure: Lower Volatility

In the chart below, we highlight the volatility of the FTSE Global Infrastructure Core 50/50 Index vs. the Alerian MLP Index and vs. the S&P 500.  In addition to midstream lagging in returns, it is doing so with higher volatility.  It’s not what you look for.

Update on Dividend Growth

Over the long-term, consistent dividend growth from infrastructure has added up to a very large positive number, compared with the negative number for MLPs.  You pay more up front for that dividend consistency and visibility, but over time you end up at a higher number.

Midstream Universe Update, Comparison to Infrastructure Universe

We have not been shy about sharing our thoughts on the devolution of the MLP market, from 100+ MLPs with seemingly endless liquidity down to a shrinking group of less than 20 investible midstream MLPs (as noted recently in this 10-year blogiversary piece). 

  • We’ve discussed how fund flows are impacting relative performance of that small group of MLPs vs. the larger corporations that own midstream assets, driven by passive inflows, but also active outflows from sector-focused MLP allocations.

In the chart below, however, we add a column off to the right that compares the midstream universe to the much larger global listed infrastructure universe.  Lower concentration in the infrastructure universe allows for more opportunities to be active and to add value by positioning the portfolio in a way that is different than the universe or index weights.

The knee jerk reaction to the chart above might be that 49 names seems like plenty to justify an allocation to a broader midstream strategy.  Maybe on its face, but digging into the trends we monitor closely here, there are a few items worth noting:

  • That 49 number for midstream companies was 53 in August and will continue to decline
  • That 49 number includes 4 MLPs that are essentially part of a family of companies that share a single general partner, so they need to be removed from the overall universe if you are considering exposure to a single general partner
    • Cheniere Energy, Inc. (LNG) and Cheniere Energy Partners (CQP) should combine to account for a single investible entity
    • Energy Transfer (ET) and Sunoco (SUN) and USA Compression (USAC) should be considered a single investible entity
    • TC Energy (TRP-CA) and TC Pipelines (TCP) should be considered a single entity
  • That 49 number includes 10 stocks that are either very small gathering & processing MLPs (like SMLP) or are gathering & processing companies tied to a single upstream producer (like AM or OMP)
    • Those 10 stocks have been re-priced to reflect E&P risk associated with their producer sponsors, and do not reflect traditional midstream risk exposure
  • If you removed those 14 companies, the universe shrinks from 49 down to 35 companies.
    • We expect that ultimate number of investible midstream companies to continue to shrink over time, with dramatic fund flow implications

Conclusion: Take a Step Back, See the Big Picture

Focusing on a niche and figuring it out can have a happy ending, like in the Dr. Suess classic story Horton Hears a Who!

But other times it doesn’t pay.  Those of us who follow the midstream sector closely can get caught up in the daily drama and miss broader forces at work.  We can get myopically fixated on an artificially high yield rather than fundamental, regulatory or capital markets headwinds.

Taking a step back can change your perspective.  Like at the end of the original Men in Black when the camera zooms out, then zooms out billions of times more to show our planet within a galaxy within a universe that’s ultimately inside of a ball being played with by an alien somewhere.  Midstream isn’t quite that small in relation to the broad market, but you get the point.

Rather than wait for the next downdraft in midstream, take a fresh look today and make sure you are getting what you signed up for with midstream.  Food for thought as you enjoy the midstream January effect.

CBRE Clarion manages a global listed infrastructure strategy on behalf of institutional clients. We are sub-advisor for a mutual fund here in the U.S., a global UCITs fund and a fund in Australia.  Our infrastructure strategy track record is approaching its 8-year anniversary.