Investment options: Where can you invest?

Previously, investment in infrastructure was largely the preserve of governments and sovereign wealth funds, but this began to change when access was granted to the masses.

Back in 2006, Hicl Infrastructure became the first infrastructure investment company on the London Stock Exchange and since then has grown to become a £1.6bn behemoth.

Several other infrastructure investment trusts have also made a name for themselves; and fund groups have also launched open-ended funds which tap into the infrastructure theme via equity investments.

In spite of this, just more than half of advisers surveyed by FTAdviser said they had not invested any of their clients’ money into the asset class, while a meagre 3.2 per cent at the opposite end of the scale were heavily invested.

As advisers will be fully aware, bringing in an asset class to a portfolio needs to be considered carefully due to its impact on the asset class mix. It needs to be considered whether an investment in infrastructure would skew a portfolio more heavily towards equities, for instance, if the route was through an investment trust.

Or whether, if being used as an income play, an addition of infrastructure would make a portfolio too income skewed. Investments whose aim is to derive income might take a portfolio slightly away from capital appreciation opportunities.

What can you expect?

What could be considered ‘direct’ investment in infrastructure is undertaken by investment trusts in the sector. They do this by directly providing finance for projects in what is usually called a public-private partnership (PPP) scheme.

There are advantages to this because the trust’s management teams tend to focus on projects backed by governments, which should mean money to pay for the construction contract is always there. Also, the projects tend to be ‘social’ infrastructure, such as roads, hospitals or libraries, meaning payment is not linked to the success of a business.

Open-ended funds on the other hand tend predominantly to invest in the stocks and shares of companies which build infrastructure, or, buy stocks in assets considered infrastructure, such as airports or energy grid companies.

Phil Ross, fund manager on the Aberdeen multi-asset funds, says the investor’s desired outcome for their portfolio has to be considered before investing in infrastructure.

“Some clients view the asset class out with main stream risk assets and in practice the inclusion of both assets tends to reduce the risk profile of the overall fund. At present the income profile of infrastructure remains elevated and in the past we have used the asset class within income-focused mandates.”

Investment trust broker Canaccord Genuity says trusts which invest in infrastructure saw a spike in correlation to equities during the financial crisis in 2008/09, but noted there were just three trusts then, two of which had “material problems with their respective advisers’ parent company”.

“[However], notably [the correlation] remained below that of most investments as global financial markets stared into the abyss. Indeed correlations remained at relatively elevated levels for the first couple of years after the markets moved into a recovery phase.

“However, there has since been a sharp fall in correlations, and the sector has averaged just 0.12 for the past three years.”

Ana Cukic Armstrong, owner of multi-asset boutique Armstrong Investment Managers, says infrastructure was a “stable and predictable, inflation-proof” investment.

“Their returns are regulated and based on long-term contracts. Infrastructure assets can adjust to inflationary expectations and pass an increase in prices to the consumer.

“The funds invest principally in equities of listed infrastructure companies. Listed infrastructure funds have better liquidity and higher diversification than those with direct investments, however, they are more correlated with the equity markets.”

Expert picks

In terms of the best opportunities in the sector at the moment, Aberdeen’s Mr Ross said he had three long-term investment trust holdings in Hicl, John Laing Infrastructure Fund and 3i Infrastructure.

However, he outlined a potential headwind for those investing now in these trusts: “The enhanced income profile against the backdrop of low rates on cash has resulted in the sector trading at a premium to net asset values.”

Mr Ross adds an offshoot of pure infrastructure has now started to become more prominent: that of renewable infrastructure, such as solar panels or wind farms.

“Most recently the emergence of the renewable infrastructure funds has gained investor attention – this is in part due to the UK’s long term commitments to renewable energy supply and lessening the reliance on carbon emissions.

“The first fund launched in March 2013 and has quickly been followed by five others. The new asset class offers investors income streams with both retail prices index and power price linkage investing into solar, wind and waste projects.”

Ms Cukic Armstrong says one of her favoured plays was the Luxembourg-domiciled Bilfinger Berger Global Infrastructure fund.

She explains the fund improves her portfolio’s sharp ratio “as the past returns are high compared to the risk of the investment”. Annual performance was 15.99 per cent against the MSCI World index’s 7.93 per cent.

The manager also invests in Japanese- based company Daito Trust Construction Company, whose shares have risen nearly 40 per cent in yen terms in the past year, according to data from Bloomberg.

“With a declining population in Japan, there is a plenty of supply of underdeveloped and abandoned properties,” Ms Cukic Armstrong says.

“The property market is still at an 80 percent discount from its peak and the main demand is for rental properties. The current young generation has not witnessed any asset price bubble in Japan.”

Adviser preferences

So while managers and analysts appear to be bullish about infrastructure, what do advisers think?

Andrew Alexander, director at Three Counties, views infrastructure as an alternative asset and therefore would “purchase it via closed-ended vehicles which offer an alternative, less volatile return than equities”.

“Open-ended infrastructure is securitised and therefore a simple thematic equity play,” he said.

“I would include it within a centralised investment proposition as part of the alternatives basket, however, the current and recent premiums [that investment trust shares trade at above the value of their assets] make the sector a non-starter.”

He adds investors should not buy a trust whose shares are trading on a 10 per cent premium, “no matter how fantastic the returns”.

So investors eyeing the sector now may want to consider the newer renewables infrastructure investment trust sector for slightly lower premiums, or select an open-ended fund whereby the manager will choose what they see as the best infrastructure stocks.

The selection of onshore funds is slightly restricted given just four funds have the word infrastructure in their title, but 17 funds based in Ireland or Luxembourg cover the sector. It may also be important to be aware of certain issues in the sector at present.

Peter Hofbauer, head of Hermes infrastructure points out the sector has pricing power and can act as “an inflation hedge”, adding the UK remains “one of the most attractive countries for infrastructure investment”.

But he says affordability could “be a key issue running up to next year’s election – with infrastructure businesses with consumer/retail elements more exposed”.

He explains: “Lower interest rates for longer remains the macro investment theme and continues to feed through to asset prices – including certain sectors of the infrastructure market.”

Mr Hofbauer says he was aiming to buy infrastructure equity investments with “debt-like risks”, so a defensive mindset might be needed.

bradley.gerrard@ft.com