The growth of infrastructure financing has been significant, though, spurred on by the increasing tendency from the government to farm out projects to the private sector.
Earlier this month, the government introduced a new Infrastructure Bill which, while it did not directly increase the number of private infrastructure projects, continued the government’s increasing focus on improving infrastructure.
While the private finance initiative (PFI) model that the government has been using to farm out the infrastructure projects has come under attack for not being in the best interests of the UK taxpayers, it does not seem to have slowed down the number of projects available for investment.
And these projects are eagerly being snapped up by the infrastructure funds available for UK retail investors.
Investors are currently unable to get access to direct infrastructure projects from an onshore open-ended fund, but there are a growing number of listed investment trusts that invest in infrastructure assets.
The very first trust to launch was Hicl Infrastructure, which was first launched in March 2006.
Through a series of new share placings, Hicl has now grown to be £1.7bn in size, which makes it one of the biggest investment trusts in the entire industry.
Hicl was followed by International Public Partnerships investment trust in November 2006 and the Infrastructure sector of the investment trust world has now grown to seven investment trusts.
In addition to conventional listed infrastructure trusts, which invest in projects such as roads and schools, there are a growing number of investment trusts investing in renewable infrastructure investment, although these trusts are still very young.
When looking at the larger, more established trusts, such as Hicl, INPP and GCP Infrastructure Investments, there is little to choose in terms of performance.
All three trusts have delivered more than 30 per cent in share price total return terms in the last three years, while Hicl and INPP have delivered just a little more than 65 per cent in the past five years, according to data from FE Analytics.
The net asset value return from the trusts mainly comes from the payments the trusts get from the projects they are running, which tend to be on long contracts and the payments can be linked to inflation.
But the payments don’t generate all of the share price total return as a large part of that has come from the trusts moving to a large premium to their net asset value.
There is not a lot to choose between the major trusts, they all tend to invest in similar projects, though advisers would do well to check under the bonnet and check the projects they invest in before choosing which trusts to buy into.
Fund buyers say that you should look at what proportion of the projects are “fully owned” and how much of the portfolio is “under construction”.
Assets under construction are more risky as things can go wrong and the asset won’t be generating a yield yet, while obviously not fully owning an asset increases the risk.
Henderson’s Ian Barrass has been increasing his exposure to infrastructure trusts, particularly renewables, within his Henderson Value Trust, which is a trust that invests in other investment trusts.
And a significant number of multi-managers and discretionary managers already hold infrastructure trusts in portfolios as they see them as a valuable diversified asset with a stable income stream.
Some, however, such as Sanlam Private Investments and Premier’s multi-manager head David Hambidge, have been reducing infrastructure exposure, due to a combination of high premiums and worries about future returns.
Infrastructure trusts are currently regularly issuing more shares in order to buy up new projects – share issuance from infrastructure trusts have made up 24.3 per cent of the total from all investment trusts so far in 2014, according to Winterflood Securities. So there are plenty of opportunities for investors to get involved.
It is, however, difficult to make a clear comparison between the various infrastructure trusts because there is no clear benchmark against which to compare them.
Earlier this month the EDHEC-Risk Institute put out a position paper outlining this problem and claiming that “investment in infrastructure by long-term investors will not be possible without adequate measures of expected performance and risk, i.e. benchmarks”.
The report stated: “Matching the huge demand for capital investment in infrastructure projects around the world with the available supply of long-term funds by institutional investors has never been so high on the international policy agenda.
“For asset allocation to long-term investments in infrastructure to grow in a sustainable manner, investors need reliable information on the performance to be expected from such investments over time and in different economic environments, and regulators need to understand the risks investors are taking to correctly calibrate their prudential frameworks.”
The institute’s paper put forward eight steps that they think should be taken in order to establish a benchmark for infrastructure investing, though it will prove difficult as it will mean accurately and frequently valuing thinly-traded assets.
However, given that there are benchmarks for direct property investing, it should not be impossible to establish an infrastructure benchmark.
Until that time, though, investors are not going to be able to measure performance or risk against a specific benchmark.
That is not the only risk inherent in infrastructure investment at the moment. All of the major trusts are trading on very large premiums to their net asset value (NAV). This means that if you buy into the trust, you are paying much more for the assets than they are currently worth.
The Hicl infrastructure trust is currently on a premium of 14.7 per cent, according to data from Winterflood Securities, while the Bilfinger Berger Global Infrastructure trust is on a 17.4 per cent premium.
Trusts go to premiums and discounts depending on the market sentiment towards them, and towards the underlying assets, and this sentiment may not change for some time.
That is why a smaller companies trust may never be a bargain even on a large discount because the discount may never close.
But it is possible that the premiums on infrastructure trusts may narrow. Winterflood Securities analyst Kieran Drake has warned that the premium throughout the infrastructure investment trust peer group “creates the potential for premium/discount volatility, particularly if interest rates begin to rise”.
A rise in interest rates is likely to threaten infrastructure trust premiums because a large proportion of investors have been attracted by the high yield on the trusts, which is generally more than 5 per cent, but that attraction may wane when rates rise and investors can access similar yields for less perceived risk.
But the yields on offer from the trusts are unlikely to change, given that they tend to invest in long-term projects that guarantee a long-term income stream. And, according to Mr Drake, “the short-term pipeline [for projects] within the UK is limited, although it looks more promising in the longer-term”.
Infrastructure looks likely to continue its appeal as a stable income diversification tool for portfolios.
