There is a new fourth utility that has swept the world in the past few years but investors continue to misevaluate its importance, according to Schroders’ Tom Walker.
The manager of the Schroder Digital Infrastructure fund said pylons, fibre and anything else that is used to connect people to the internet have become as important as water, gas and electricity in the modern age and should be viewed as the next utility.
He pointed to the war in Ukraine as an example, with Russia “purposefully targeting infrastructure” by “knocking out towers and data centres and cutting off the fibre and connection to the internet”.
While we take it for granted, this infrastructure is “absolutely essential” for every single form of communication, whether it be a text, call, email or video.
The information is sent to a tower, passing through fibre which connects it to a data centre. Here the algorithm determines where to direct the message, before it is sent through more fibre and eventually to another tower.
“No matter who you are, every single communication goes through these and we believe that the importance is only going to grow as economies become more digitised,” he said.
However, the market has yet to catch up to his way of thinking. Indeed, since he and co-manager Hugo Machin took charge of Schroder Digital Infrastructure in 2014, it has been the second-worst performing fund in the IA infrastructure sector.
Total return of fund vs sector and benchmark since manager start
Source: FE Analytics
It has also performed poorly over one, three, five and 10 years, sitting in the bottom quartile of the sector over each period.
However, there are catalysts for change. One of which is that every country in the world has a digital strategy, according to Walker.
“They all understand that if they are not investing in these pieces of infrastructure they will fall behind economically and will fall behind socially,” he said.
In the UK, the government has set ambitious goals for digital infrastructure but it is not alone in doing so, with many others offering huge financial support to improve their countries’ networks.
This does lead to questions around regulation and even potential nationalisation at some point; Walker noted this is possible but that he is unconcerned as “it is too big a sector and there are too many people who need it for it to be become overly regulated”.
One catalyst for change in the performance of his fund could be the roll-out of 5G, something that has led to some wild theories but it is a necessity for the digital age.
“If you go to a concert or a stadium and try to call someone it may get blocked. That is because you have too many people in one area that are trying to use 4G and the system is at capacity so it cannot process any more,” Walker said.
“When you get to 5G you won’t have those issues. You will be able to be in a more densely populated area and still use your phones as normal.”
This has been necessitated because the number of people with mobile phones has increased, while the way they are used has also changed, going from being primarily for calls and messages to using social media and downloading videos much more often.
“The 4G to 5G is really interesting from our perspective because all of the mobile phone operators all need to build out the network. The equipment on all of the towers will be 4G and will all need updating. So that leads to opportunities for the owners of the towers, which we are investing in,” he said.
“Over the next two to three years every mobile company will need to upgrade because if they don’t then they will lose consumers to rivals who have 5G.”
And there is already talk of a 6G network being built, as there is anticipation that even more people, particularly in the emerging markets such as India and China, will rely on the internet, although this is unlikely to be required until between 2028 and 2030 at the earliest, he said.
Darius McDermott, managing director of Chelsea Financial, agrees with Walker that the digital infrastructure market is one that could propel growth for years to come.
Earlier this month he wrote that we need the physical networks to enable that transmission, meaning that the network needs to grow, and fast.
“The tailwinds behind digital infrastructure are immense. Funds like Schroder Digital Infrastructure or M&G Global Listed Infrastructure are ideal starting points, with both also offering clients an attractive income too,” he said.