JPMorgan AM: ‘core-plus transportation’ could rival traditional infra as an asset class

Asset manager estimates the subsector could require as much as $4.5trn in financing over the next 10 years as bank lenders exit the market.

JPMorgan Asset Management has said that transportation – such as ships, aircraft, rail and energy-related transport assets – could grow to become an entirely new type of asset class within alternative investment to sit alongside traditional infrastructure and real estate.

Anurag Agarwal, head of portfolio management at the company’s global transportation group, told a media briefing in Sydney that growing demand and regulatory changes were leading banks to exit leasing for these assets, and that this presented opportunities for investors, including those in the infrastructure space.

Agarwal said that his company had estimated that what it dubs “core-plus transportation” could require $4.5 trillion in financing over the next 10 years. The projected figure takes into account economic growth forecasts.

The assets in question include energy logistics facilities, such as liquefied natural gas carriers and ships for offshore construction; maritime assets, such as tankers and container ships; narrow- and wide-bodied aircraft; and railcars and other types of vehicle.

All of these assets are underpinned by counterparties with long-term leases, which often cover the assets’ entire useful lives. This distinguishes them from opportunistic transport investments with short-term leases that are exposed to cyclical commodity values and higher levels of price volatility. Counterparties are generally large corporations such as oil majors, mining companies or utilities.

“These transportation assets have a finite useful life of around 25 years on average,” Agarwal said. “That tells you that every year about 4 percent of the world’s fleet of trains, ships and planes ages out and has to be replaced – and that’s with no influence [from] growth.

“If you add a modest amount of growth from all parts of the world, we think you can expect an annual increase of about 6-8 percent in the global fleet. So, over the next 10 years, we believe there is a need for about $4.5 trillion of transportation assets that will be coming online – and these need to be financed.”

Agarwal said transportation assets are often considered to be “moving infrastructure” and, as such, fit “nicely with or alongside traditional infrastructure”, because a liquefied natural gas carrier, for example, in effect performs the same function as a pipeline.

“The two worlds certainly touch on the fringes: you have airports and aircraft, and you have ports and ships,” he said. “The drivers that make one of those areas work is not too different from the drivers that influence another. It fits logically in the same mindset of investing.”

Agarwal said that some investors may feel they have reached saturation with traditional infrastructure assets. He added that transportation could provide diversification to their real assets portfolio, and offer an additional home for the large amounts of dry powder raised by fund managers.

He pointed to low levels of correlation between transportation and other asset classes. Figures compiled by JPMorgan Asset Management showed that core-plus transportation has a correlation of zero with global bonds and 0.1 with global equities, and a correlation of 0.3 with both global core infrastructure and European core real estate.

‘A new source of yield’
Traditionally, financing for these assets has come from banks. However, Agarwal said the advent of regulatory changes such as Basel III, the Dodd-Frank Act and the EU’s Capital Requirements Directive IV – all passed in the wake of the global financial crisis – have encouraged banks to return to being senior secured lenders rather than holders of equity.

According to figures compiled by JPMorgan Asset Management, only $18.7 billion of shipping loans were provided by banks in 2017, compared with $86.7 billion in 2007.

“This clearly suggests the impact regulation has had [as] a major constraint on the ability of the traditional incumbent providers of this capital to continue to participate in these long-duration leases with these corporations for their large-scale hub supply chain assets,” Agarwal said. “Had this regulation not come in, we’re not of the view that anyone would be able to access this marketplace.”

Agarwal said core-plus transportation also compares favourably with infrastructure when it comes to the levels of return derived from income.

“In core-plus investing, you should be looking at how much of your return comes from income as a percentage, so you’re not basing your return thesis on asset value appreciation or sales,” he said. “In real estate, we believe that number is somewhere around 60 percent. In infrastructure the number gets better: it’s somewhere in the 70-75 percent range.

“In transportation, we tend to see that number being closer to 90 or 95 percent. That suggests that most of your return in core-plus transportation investing can come from contracted income – which is attractive, clearly, if you’re focused on yield.”

Agarwal added that core-plus transportation could now be seen as a “new source of yield” and an “exciting new area of investing for the private markets”.