Investing in infrastructure of the nation can reap rewards
PERSONAL INVESTING in the nation’s infrastructure has opened a new opportunity with the potential to generate attractive returns. Yet often savers are not aware that they may already be invested in major schemes actually on their doorstep.
Pension providers have frequently taken a long-term view that the capital to which they are entrusted would reap good returns through such a route. Some decades ago pension funds in Germany produced a leaflet for each town and city, naming major projects where they were invested, both to inform and to act as a disincentive to nationalisation.
Infrastructure companies are often used as part of a multi-asset portfolio for their “strong diversification benefits alongside stable, inflation-linked return and yield”, says Eugene Philalithis, portfolio manager at Fidelity’s Multi-Asset income Fund.
Such assets have a low correlation to the wider stock market and more traditional asset classes which means they could be very attractive as the current market cycle matures and there is so much uncertainty over Brexit.
The sector has been growing since the global financial crisis for its good income at a time of exceptionally low interest rates and because of its lower risk. Infrastructure projects usually have the solid backing of Government where the costs of construction are met by the investor but in return they have a reliable tenant for decades, not years.
The saver therefore takes the rental yield less charges. Since rents are generally linked to inflation, such as the Retail Prices Index, or have inbuilt year-on-year return increases, the income is protected.
The sector has two main forms:
Listed companies where savers have greater liquidity and usually lower fees
Unlisted where a fund invests directly into an infrastructure project.
The latter can usually exert a material level of control over the management of the project. Examples include social infrastructure like schools, hospitals and prisons.
Public partnership projects (PPP) to reduce public sector borrowing were opened up in 1989 in the UK with the first deal three years later. The Treasury saw three advantages: a strong incentive to keep building to budget, to curb running costs and to ensure better long-term maintenance.
To date there are over 700 projects with a capital value of some £60bn and an annual running cost of £10.3bn. Money invested is not risk-free as the Shadow Chancellor has said PPP will be nationalised and the scheme discontinued if Labour takes power.
With listed firms and funds usually trading at a premium to their assets, Jason Hollands of Tilney recommends gaining shares when additional capital is being raised through new issues. His exception is International Public Partnerships which is very diversified with over 125 holdings, 29 per cent of which are non-UK, and yields 4.7 per cent.
Global infrastructure spending is forecast to be $9trn by 2025. For many developed countries, the focus will be more on upgrading and improving efficiency, which can be just as costly as building from scratch. In the UK, road upgrades to 2020 will cost £15bn.
Adrian Lowcock, head of personal investing at advisers Willis Owen, says that “on balance PPPs are good diversifiers and the recent selloff has presented an investment opportunity.”
He favours First State Global Listed Infrastructure which focuses on quality firms trading at attractive prices, primarily in developed countries. The manager adopts a contrarian approach which can mean underperformance in the short term and is more defensive than its peers.
With fixed income yields becoming negligible and equity prices across most developed markets relatively expensive, “infrastructure investment has become a hot topic”, says James Rowbury of broker Redmayne Bentley.
He tips International Public Partnerships whose assets range from energy and transport to housing and healthcare with a bias towards the UK. The fund has returned 8.1 per cent annually since launch in 2006 and yields over 4.5 per cent.
Sequoia Economic Infrastructure Income is Rowbury’s second choice, which started in March 2015, focusing on primary market debt on worldwide projects. It yields 5.5 per cent and has returned an annualised 7.2 per cent over three years.
Legg Mason RARE Global Infrastructure has 35 holdings in airports, rail and communication, electricity, gas and water of which 36 per cent is in North America. The fund, which yields 4.1 per cent, is singled out by Martin Payne, senior investment manager at Brewin Dolphin in Leeds.
Like Lowcock, he also likes First State’s fund but also the Renewables Infrastructure Group which has 61 assets across wind, solar and battery storage in the UK, France and Ireland. It is on track to yield 5.7 per cent but is on a premium to asset value of over eight per cent.
Both Payne and Philalithis like HICL Infrastructure which is UK based but also operates in Europe, Australia and North America. Its projects support the community but the share price has been hit by the collapse of Carillon and Labour party comments.
Jonathan Baker, investment director of Charles Stanley in Leeds, says they sold their general infrastructure funds following the sharp falls in equity markets in February. He still remains enthusiastic over the sector in the long term, saying this is “one of the few ways in which governments can inject money into the local economy and ensure regional economic growth is maintained.”
Baker says the speed that money was pumped into infrastructure projects could exit as quickly. He is also concerned over the adverse report on PPP by the National Audit Office earlier this year. His current choices are Greencoat Wind, which invests largely in UK wind farms, and Foresight Solar.
In the early stages of construction of power stations, port and pipelines, it can take time to make a profit, warns Danny Cox of private client discount broker Hargreaves Lansdown but adds: “Once they do, the income is normally steady and reliable.”
Apart from funds like First State, Cox suggests such individual companies as the National Grid, which operates in both the UK and USA, and yields a reliable 5.8 per cent.
Projects can be far more wide ranging than many realise, says Ian Forrest at The Share Centre, citing fire stations and student accommodation to fibre-optic cable networks and mobile phone masts. He suggests Costain for its involvement in HS2 and nuclear plants at Sellafield and Hinkley Point.
Outside the UK, Keller is his tip, notably for its climate change work on better flood and hurricane defences.
For a unique mix of direct equity and bonds in the sector, Darius McDermott at Chelsea Financial Services likes VT Gravis UK Infrastructure Income. He says it is the only fund wholly focused on UK investments and currently yields 5.3 per cent.