Infrastructure can provide the building blocks of your portfolio
INFRASTRUCTURE IS a buzz word which is much discussed by politicians and financiers alike who wish to ensure fixed installations are in place for generations to come.
In the UK, the Government is seeking over £200bn for infrastructure investment over the next five years. Yet investing in such works is not just for corporate entrepreneurs. Many individuals may not realise they can access such an attractive proposition.
At a time of weak global growth and uncertainty, infrastructure has strong investment appeal. Projects as diverse as ports, prisons, toll roads and rail networks to airports, electricity grids, hospitals and schools are typically underpinned by very long-term contracts which often include clauses where revenues are annually inflation-adjusted.
The prospect brings very dependable returns that are not heavily exposed to the fluctuations of the economic cycle and with a welcome degree of inflation proofing.
Spending on infrastructure is forecast to rocket in the next decade. After years where central banks have provided monetary stimulus through low interest rates and quantitative easing, the pendulum now appears to be recalibrating in favour of governments doing more through their fiscal policy and infrastructure investment.
Japan has already announced a major package of capital projects. Both the major US Presidential candidates have promised significant investment and all eyes will be on Philip Hammond for his Autumn Statement next month to see if he will announce new spending programmes to support the UK economy through its EU divorce and beyond.
A new industrial strategy for the UK is expected to emerge shortly, led by the Prime Minister, and is likely to have cross-party support as Jeremy Corbyn has already vowed to fund “municipal socialism for the 21st century”.
The two major routes for savers to access infrastructure are listed investment companies that are exposed to operational projects and shares in companies which focus on infrastructure.
The former offers both asset class diversification and the elixir of income yield. The dilemma is that because the income is so attractive at a time when yields elsewhere are low, the premium that has to be paid on the net asset value (NAV) is eye-popping.
Typically, London-listed investment companies in this sector are yielding four to 5.2 per cent but the average share price premium to NAV has risen to 16 per cent, which many will find too steep.
One idea is to register interest with your broker and wait for new funds to be listed. There may be a chance to participate in new share offers if such trusts seek more cash to take on fresh projects. High quality trusts include: HICL Infrastructure International Public Partnerships John Laing Infrastructure. An alternative approach is to subscribe to some of the infrastructure equity funds although they do not offer the same level of yield as investment companies but do bring global exposure. Jason Hollands of Tilney Bestinvest, which advises Saga clients, likes Lazard Global Listed Infrastructure Equity fund in this connection.
It focuses on businesses which provide essential services with monopoly-like characteristics.
The sector has to date “provided relatively stable returns alongside steady dividend growth and in equity terms would generally be regarded as being towards the lower risk end”, says Martin Payne, Leeds-based director of wealth manager Brewin Dolphin.
Payne tips the newly launched Legg Mason Rare Global Infrastructure Income fund which invests in a range of global securities including electricity, gas and water utilities, telecommunications and transport. The fund aims for both long-term capital growth and a high level of income, expecting to achieve five per cent annually.
He also likes HICL Infrastructure which invests in PFI (Public Funding Infrastructure) and PPP (PublicPrivate Partnership) initiatives across the UK and northern Europe including hospitals, schools and major transport schemes. It initially had a 7-8 per cent return target but today yields a still attractive 4.5 per cent with scope to rise in line with inflation.
Jonathan Baker, investment director at Charles Stanley, tips the same two funds, saying HICL Infrastructure is well-managed and “deserves its high profile and reputation”.
He does warn that whilst the trust’s income is unlikely to be affected by rising bond yields, there is the potential for its share price or NAV to come under pressure in the event Government bond prices fall.
Baker says the investment process at the Legg Mason fund is supported by a highly experienced team of 15 located throughout the world. “It has generated exceptional cash returns over the past 5-10 years and will provide a solid and very stable capital and income returns.”
Medicx Find is a hybrid between a property and an infrastructure trust, investing in around 100 modern, purposebuilt primary healthcare properties. Payne says the NHS acts as the underlying tenant which provides a source of longterm government-backed cash flow.
Rents are reviewed every three years, which is upward only, giving good prospects for rising income. The current income yield is 6.7 per cent.
“At the moment infrastructure is ticking a lot of boxes from large-scale projects like power networks to equally essential structures such as GP surgeries,” says Darius McDermott of Chelsea Financial Services, who likes the lower volatility, resilient and predictable earnings and inflation protection offered by the sector.
He says demand is likely to increase further and notes “there was a sharp uplift in performance and premium in the days post-Brexit”. In addition to the Legg Mason fund, McDermott tips VT UK Infrastructure Income, which launched earlier this year.
Around two-thirds is invested in investment trusts exposed to different types of infrastructure and the balance in direct equities and fixed income. It has a five per cent yield.
Passive fans can access this asset class through DB X-Trackers S&P Global Infrastructure exchange traded fund which follows the 75 largest infrastructure equities in the world across three clusters: energy, transport and utilities. It has a very low 0.6 per cent ongoing cost.
Redmayne-Bentley’s Leedsbased investment manager, Phillip Wong, likes both the HICL and VT funds, noting that the latter is the first UK-focused open-ended infrastructure collective.
Its holdings include Greencoat UK Wind and Renewables Infrastructure which therefore offers a diverse route for investors across all types of projects.
A further idea is the Foresight Solar Fund which returns around six per cent by generating and selling electricity to the National Grid and receiving a Government payment as the energy generated is from a renewable source. Around half the assets are RPI inflation protected for over a decade forward.
Finally, concessions typically run for 20 or 25 years which means that no bricks and mortar are then held. Ensure therefore that the manager is investing in new projects, thereby prolonging the life of the fund or trust.
Conal Gregory is AIC Regional Financial Journalist of the Year.