InvestmentsDec 1 2014

Adviser views: Good for income, but expensive

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Financial advisers looking for diversification have been eyeing trendy infrastructure funds, but many are finding them overpriced and are holding off investing. These are among the findings of research undertaken by FTAdviser among advisers in November.

Out of 156 advisers polled, 13.5 per cent said they ‘moderately’ recommended infrastructure funds to their clients in the past year.

This number is growing. When asked if they plan to recommend them in the coming year, more than 16 per cent said they were similarly likely to moderately recommend them, while 27 per cent said they have become more likely to invest in infrastructure funds in the past six months.

Looking for alternatives

Investors and advisers have been zeroing in on alternatives to traditional equity and bond investments. Loose monetary policy in developed markets and volatile or modest returns from traditional asset classes have forced people out of their comfort zones.

Originally ‘alternatives’ meant the likes of property and commodities, but these have become somewhat mainstream and so the new hip thing for investors is niche and specialist areas. Infrastructure sits in one of these niches.

Advisers mostly use infrastructure funds as a diversifier, with 87.5 per cent claiming they use them to broaden their portfolio. Meanwhile 62.5 per cent use it as a means to balance risk in a portfolio and 40 per cent use the funds as an inflation hedge.

Gavin Haynes, managing director of Whitechurch Securities is investing in infrastructure funds at the moment. He does so, he explains, to shore up his portfolio with a defensive asset with attractive income flows.

“In the current economic climate areas of the equity market that provide strong and sustainable growth potential and attractive income flows are sought after and infrastructure is providing good opportunities,” he says.

Income is a common theme: in the survey 30 per cent of advisers said they would invest in infrastructure funds for income. This brings it in fourth for income seekers behind equity (87 per cent), fixed income (79.5 per cent), and property (69 per cent).

Taking it on trust

But not all infrastructure investments are made equal.

Jason Hollands, business development and communications director at Tilney Bestinvest, is quite particular about how he invests in infrastructure: he opts for operational infrastructure projects rather than companies involved in infrastructure, including roads, ports and hospitals.

He explains that operational infrastructure projects give investors “stable and very long term income streams” - and importantly are under legal contract.

To gain access to these projects Mr. Hollands recommends the closed ended investment trusts which predominate. Infrastructure investment trusts were one of the top four investment company sectors purchased off platforms in the second quarter of this year.

One problem with this is that since these products have an attractive yield, they are “almost universally trading at significant premiums”. This means investors are effectively having to pay a penalty to get into the fund.

This in turn is in part because there are few options in the sector. In fact there are just three funds that dominate: First State Global Listed Infrastructure fund, which 67 per cent of surveyed advisers who have backed infrastructure invest in; HCL Infrastructure (35 per cent); and Lazard Global Listed Infrastructure Equity fund (23 per cent).

Tony Yarrow, founder of Wise Investments agrees that these infrastructure funds look expensive at the moment.

“The sector leader is HICL infrastructure fund, which trades on a premium of around 20 per cent to its net asset value. That means you’re paying roughly £1.20 for each £1.00’s worth of assets.”

So while Mr Yarrow agrees that these funds give an investor a “secure long-term income stream with a degree of inflation proofing”, he thinks at the moment you are paying too much for that privilege and there are better alternatives.

Another concern rattling prospective adviser recommenders is how funds and trusts will react when rates and inflation rise.

Many of these trusts have some inflation-linked protection through their contracts, but advisers have suggested that there may be a delay from when inflation rises and when the retail price rises under the terms of contracts. This would mean the net retail price would fall in the short term.

Withering rivals

Data continue to point to increased infrastructure spending which could in turn bring more funds into the space and boost the supply of funds.

A recent white paper from The Boston Company Asset Management, the Boston-based equity investor for BNY Mellon, notes that a revival in infrastructure spending is likely to occur in the next decade.

The report explained that there are decaying bridges and roads across the US and other developed economies. For instance, in Germany a recent government study showed that $9.7bn needs to be spent annually just to maintain current infrastructure.

Until more supply appears, an alternative that advisers are opting for are commodities, which Mr Yarrow thinks look cheap at the moment. According to the survey, only 4.5 per cent of advisers are moderately recommending commodities.

But others do not see commodities as a good bet at the moment, with Mr Hollands citing softening. commodity prices as China’s growth slows.

“China has been a key lever on raw material prices for more than a decade, fuelling the so-called commodity super-cycle with its voracious appetite for resources to supply its construction and infrastructure blitz.”

The gross domestic product in China fell from 7.5 per cent year-on-year in the second quarter to 7.3 per cent in the third. This growth is likely to continue to slow, with economists predicting 7 per cent growth for next year.

So as Chinese growth slows the weakness in commodity prices is likely to remain. And that is probably music to the news of infrastructure fund managers.

kathleen.gallagher@ft.com